Whether you're using a professional builder or serving as your own general contractor, having a new home built is an exciting time, but it can also have its challenges. Unfortunately, some of the challenges you face can result in financial losses.
New construction insurance, more often referred to as builders risk insurance, can help minimize some of those losses.
But what is new construction insurance, and what does it protect against? When should you acquire it? What contributes to its costs, and what must you do to secure it?
In this guide, we explore various aspects of new construction insurance and its essential role in building or renovating your home.
What does new construction insurance cover?
New construction insurance is a temporary, short-term insurance product intended to protect people's investments throughout the renovation or construction phase of a house or other type of building. This coverage isn’t standardized, but policies often cover damage to items like:
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The building’s structure.
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Building materials.
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The contractor's equipment.
Policies may also cover a contractor’s general liability as well as costs stemming from delays.
Let's say, for example, the frame of your new home has been completed but is destroyed in a windstorm. New construction insurance can help cover the cost of rebuilding what had been completed. And if reframing the house sets the entire project back, new construction insurance may help with increased costs like real estate taxes and loan interest payments.
What is builders risk insurance?
Builders risk insurance is the insurance industry term for a policy that provides financial protection for people who have an insurable interest in a home that is being built. This coverage is also good for protecting against financial loss during a major rebuild, renovation, or room addition.
When should you buy home insurance when building a new house?
You want to make sure a builders risk or new construction policy is in the mix before breaking ground on your project. In fact, places where the law mandates this coverage may require proof of insurance in order to get certain building permits.
Getting a policy, however, isn’t necessarily your responsibility. Either you (the property owner) or the general contractor may buy coverage – just be sure to have a conversation about new construction insurance before you break ground.
Once your home is built, you’ll want to make sure you replace your new construction insurance with a home insurance policy that also covers personal property and liability claims. If you’re renovating your home, make sure you call your insurance company representative to see if your current policy provides coverage during renovations and still meets your needs. Major renovations may mean you need to update your insurance.
How long do you need construction insurance?
How long you need coverage depends largely on how long your home construction project takes.You can often get policy terms that are as short as three months or as long as 12 months.
Of course, figuring out how long your project might take is tricky because it’s dependent on so many factors: the type and availability of materials used, how quickly you can get permits, how efficient the builder or contractors are when building your house. Even the weather plays a role.
It’s not uncommon for a completely new, from-the-ground-up, stick-built project to take a year or longer. Luckily, you can usually get an extension on new construction insurance if your project faces delays.
How new construction insurance differs from homeowners insurance
Construction projects – whether you're remodeling, renovating, or building from the ground up – face different risks than a completed home does. For example, a home that’s being built doesn’t need contents insurance because you’re likely storing your personal property elsewhere. Additional living expenses and medical payments for visitors to your property are also usually not covered by new construction insurance.
Another difference? Numerous people can have a financial stake in a construction project, too. Depending on the type of project, you might have contractors, lenders, architects, and developers, all of whom may need the financial protection of a builders risk policy. Standard home insurance doesn’t account for this.
That said, there are some similarities between home insurance and new construction insurance. Both, for example, protect the structure from common perils like wind, lightning, hail, vandalism, fire, and even burst pipes.
You can also customize both types of protection. Based on your risk tolerance and budget, you might add or exclude perils with endorsements.
Cost of new construction insurance
New construction insurance is typically between 1% and 5% of the total project cost. However, your specific costs may vary depending on several factors.
Location
Cities that require builders risk insurance may also require you get a certain amount of coverage, and that may increase your costs. Additionally, materials may cost more in certain areas.
Weather-related risks
New construction insurance can guard against losses caused by several weather events. If your home is an area where these events are more likely to cause damage, you may see higher costs. Moreover, severe storms can cause delays, and insurance companies may account for this in their premiums.
Size and scope of the project
Bigger projects create more opportunity for problems, so the longer your project takes or the more complex it is, the higher your premium may be. The same can be said for the quality of your construction materials. Insuring high-quality items costs more because they cost more to replace.
What might be surprising to some is that insuring a renovation is often more expensive than insuring new construction. The reason? A renovation can increase the risk to the existing structure.
Coverage limits and deductibles
Like standard home insurance, a policy's coverage limits and deductibles significantly affect what you pay for it. Increasing coverage, adding riders, and lowering deductibles can all increase your premium.
How to choose the right policy
Costs always play a factor when choosing insurance, but there are other factors to consider. Conduct your due diligence to learn more about the insurance companies that offer new construction insurance so you can be confident that you have quality coverage.
Compare providers
Look for providers with experience covering residential construction projects in your state. They are more likely to have encountered the challenges of insuring home construction in your state.
You may also want to look at each provider's financial ratings. That can give you peace of mind that your insurer can meet its commitment if you have a claim.
Compare coverages
Compare coverage on an apples-to-apples basis. This starts with looking at similar policy limits and deductibles. You'll also want to compare if policy benefits are paid on an actual cash value or replacement cost value basis and what endorsements or exclusions are included.
Work with an experienced agent.
An experienced insurance agent can help you assess your risk and choose the appropriate coverage for your project. They can also steer you to valuable discounts.
Highlighting the importance of new construction insurance
Understanding the nuances of what’s covered by new construction insurance can help you better protect your investment when building or renovating your property. Be sure to thoroughly investigate your options with the assistance of an experienced insurance agent.
