Builder’s Risk Insurance Claims: Coverage for Properties Under Construction, Renovation Losses, and Common Disputes

A property under construction or undergoing major renovation faces risks that a standard property insurance policy was never designed to cover. Materials stored on site can be stolen or damaged by weather. Partially completed structures are vulnerable to wind, fire, and vandalism. Delays caused by covered losses can result in carrying costs, loan interest, and lost rental income that dwarf the physical damage itself. Builder’s risk insurance — sometimes called course of construction insurance — exists to address these unique exposures.

Builder’s risk policies are fundamentally different from standard property policies in their structure, scope, and the disputes they generate. This article explains what builder’s risk policies cover, how they work, and the most common claim disputes that arise under these policies.

What Builder’s Risk Policies Cover

A builder’s risk policy is a specialized form of property insurance that covers a structure during the course of construction, renovation, or rehabilitation. The policy typically covers:

• The structure itself: The building as it is being constructed, including all permanent materials and fixtures that have been incorporated into the structure
• Building materials and supplies: Materials stored on the construction site that are intended for use in the project, including lumber, steel, roofing materials, plumbing fixtures, and similar items
• Materials in transit: Many policies cover building materials while being transported to the construction site, subject to a sublimit
• Temporary structures: Scaffolding, temporary fencing, construction trailers, and other temporary structures used in connection with the project
• Foundations and underground work: Foundations, footings, and underground utilities that are part of the construction project
• Landscaping and site work: Some policies cover hardscape, landscaping, and site improvements, though these are often subject to sublimits

How Builder’s Risk Policies Differ from Standard Property Insurance

Builder’s risk policies differ from standard property policies in several important ways:

• Insurable value increases over time.Unlike a standard property policy where the insured value is relatively stable, a builder’s risk policy covers a project whose value increases as construction progresses. The policy is typically written for the completed value of the project, but the insurable interest at any given time is only the value of work completed to date plus materials on site. Some policies use a reporting form where the insured reports the value of work completed at regular intervals.
• The policy has a defined term.Builder’s risk policies are not ongoing like standard property policies. They are written for a specific construction period and expire when the project is completed, when the structure is occupied, or when a permanent property policy takes effect — whichever occurs first. Extensions may be available if construction takes longer than anticipated, but they are not automatic and often require additional premium.
• Named perils vs. all risk.Builder’s risk policies come in both named perils and all risk (sometimes called “special form” or “open perils”) versions. An all risk builder’s risk policy covers all causes of loss unless specifically excluded, which provides significantly broader protection. Named perils policies cover only the specific perils listed in the policy. Given the variety of risks on a construction site, an all risk policy is strongly preferred.
• Multiple insured parties.A standard homeowner’s policy typically insures only the property owner and household members. A builder’s risk policy often insures the owner, the general contractor, and subcontractors, reflecting the multiple parties with an insurable interest in the project.

Soft Costs Coverage

One of the most valuable and most frequently underinsured components of a builder’s risk policy is soft costs coverage. “Soft costs” are the indirect financial losses that result from a covered delay in construction — costs that are not part of the physical repair but that the owner or developer incurs because the project takes longer to complete than planned.

Soft costs can include:

• Construction loan interest: The additional interest that accrues on the construction loan during the delay period. On a large project, this can amount to tens or hundreds of thousands of dollars per month.
• Real estate taxes: Property taxes that continue to accrue during the delay period
• Architectural and engineering fees: Redesign costs, re-engineering, and additional inspections required as a result of the loss
• Permit and inspection fees: Costs of obtaining new or revised building permits and additional inspections necessitated by the damage
• Legal and accounting fees: Professional fees incurred as a direct result of the loss
• Lost rental income: Income that the completed project would have generated during the delay period
• Advertising and leasing costs: Additional marketing expenses resulting from delayed project completion

Delay in Completion Coverage

Closely related to soft costs is delay in completion coverage, which provides broader protection against the financial consequences of a covered delay. While soft costs coverage focuses on specific categories of ongoing expenses, delay in completion coverage may also address the loss of anticipated revenue or profit that results from the delayed opening or occupancy of the project.

For a developer building a commercial property or a residential development, the difference between completing the project on time and completing it six months late can represent millions of dollars in lost revenue. Delay in completion coverage is designed to bridge that gap, but the policy terms must be carefully reviewed to understand what triggers the coverage, how the delay period is measured, and what costs are included.

Common Claim Disputes Under Builder’s Risk Policies

The “Testing” Exclusion

Many builder’s risk policies contain an exclusion for damage that occurs during testing of equipment, machinery, or building systems. This exclusion is intended to address the risk that newly installed systems may fail during commissioning, but carriers sometimes apply it more broadly than intended — for example, denying coverage for a fire that starts during the testing of an HVAC system, even though the fire damage to the structure itself had nothing to do with whether the HVAC system passed its test.

The proper application of the testing exclusion should focus on damage to the item being tested, not on consequential damage to other property caused by a covered peril (such as fire) that happened to originate during testing. Policyholders facing a testing exclusion denial should carefully analyze whether the exclusion applies only to the tested equipment or to all resulting damage.

Faulty Workmanship vs. Resulting Damage

The faulty workmanship exclusion is one of the most disputed provisions in builder’s risk insurance. Virtually every builder’s risk policy excludes the cost of correcting faulty workmanship itself — the policy is not a construction warranty. However, the resulting damage caused by faulty workmanship may be covered, depending on the policy language.

For example, if a plumber installs a pipe incorrectly and the pipe fails, the cost to reinstall the pipe correctly is excluded as faulty workmanship. But the water damage to the floors, walls, and electrical systems caused by the pipe failure may be covered as resulting damage from a covered peril (water damage). The distinction between the defective work and the resulting damage is critical, and carriers frequently attempt to apply the faulty workmanship exclusion more broadly than the policy language supports.

The “Completed Operations” Cutoff

Builder’s risk coverage ends when the project is completed. But determining exactly when a project is “completed” can be surprisingly difficult and is a frequent source of disputes. Policies typically define the end of coverage as the earliest of several events: the date the building is put to its intended use, the date the owner accepts the building, the date a certificate of occupancy is issued, or the policy expiration date.

Disputes arise when a loss occurs during the transition period — after substantial completion but before final completion, during a phased occupancy where some units are occupied while others are still under construction, or after the certificate of occupancy is issued but before punch list work is finished. Carriers may argue that coverage ended before the loss occurred, while the policyholder may argue that the project was not truly complete.

Policyholders should pay careful attention to the policy’s definition of completion and ensure that a permanent property policy is in place before or simultaneous with the termination of the builder’s risk policy. A gap between the expiration of builder’s risk coverage and the inception of permanent coverage leaves the property uninsured.

Theft and Vandalism on Construction Sites

Construction sites are targets for theft of materials and equipment, as well as vandalism. Builder’s risk policies generally cover theft and vandalism, but may impose conditions — such as requirements for site security, fencing, or locked storage — that must be met for coverage to apply. A carrier that denies a theft claim based on inadequate site security should be required to demonstrate that the policy contains a specific security requirement that was violated, not simply that the carrier believes the site should have been more secure.

California-Specific Considerations

California’s construction regulatory environment creates additional considerations for builder’s risk claims:

• Title 24 compliance:California’s Building Standards Code (Title 24) is updated on a triennial cycle. If a covered loss requires repairs that trigger code upgrades under the current edition of Title 24, the additional cost of compliance may be covered under the builder’s risk policy’s ordinance or law coverage, if included. However, many builder’s risk policies do not include ordinance or law coverage, which can leave the policyholder responsible for code upgrade costs.
• Cal/OSHA requirements: If a covered loss exposes hazardous materials (such as asbestos in a renovation project) or creates workplace safety hazards that must be remediated before construction can resume, the cost of compliance with Cal/OSHA requirements may be an additional expense that should be included in the claim.
• Permit reissuance costs: In California, a significant loss during construction may require the owner to obtain revised building permits and undergo additional plan review by the local building department. These costs can be substantial and should be documented and claimed.
• Wildfire and seismic risk:California’s exposure to wildfire and earthquakes affects builder’s risk coverage. Wildfire coverage is typically included in an all risk builder’s risk policy, but earthquake coverage is usually excluded and must be added by endorsement for an additional premium. For projects in wildfire-prone areas, confirm that the policy does not contain a wildfire sublimit or a separate wildfire deductible.
• Contractor licensing:California’s Contractors State License Board (CSLB) requires that contractors performing repair work after a covered loss be properly licensed. Using unlicensed contractors can create legal and insurance complications.

Documentation Strategies for Builder’s Risk Claims

Builder’s risk claims require documentation that goes beyond what is needed for a standard property claim. The following strategies can help maximize recovery:

1. Maintain contemporaneous progress records. Regular progress photographs, daily construction logs, and weekly progress reports establish the condition of the project before the loss and the value of work completed to date. These records are invaluable when the carrier disputes the extent of damage.
2. Preserve the construction schedule. The original construction schedule, as well as any updates, is essential for documenting delay claims. A comparison of the pre-loss schedule to the actual completion timeline establishes the length of the delay and the resulting soft costs.
3. Document all soft costs from day one. Begin tracking soft costs immediately after the loss. Loan interest, tax payments, professional fees, and other carrying costs add up quickly, and contemporaneous documentation is far more persuasive than after-the-fact reconstruction.
4. Separate damaged from undamaged work. The carrier will want to determine what work was damaged and what was not. Detailed progress records help establish this boundary and prevent the carrier from undervaluing the loss by claiming that work was incomplete or not yet performed.
5. Obtain a forensic analysis of the cause. For losses involving faulty workmanship, fire, or structural failure, an independent forensic analysis by a qualified engineer or investigator can establish the cause of loss and help overcome carrier objections based on the faulty workmanship or testing exclusions.
6. Track the delay in detail. Document the timeline from the date of loss through the completion of repairs, including all the intermediate steps: investigation, engineering, plan revision, permit reissuance, rebidding, and reconstruction. Each step contributes to the total delay and the associated soft costs.

Sources & Further Reading

• Peckar & Abramson, P.C.— A national construction law firm that has published analyses of builder’s risk policy provisions, including the faulty workmanship exclusion, soft costs coverage, and delay in completion disputes. As the firm has noted, “the builder’s risk policy is often the most important insurance document on a construction project, yet it is frequently the least understood.” Search for their construction insurance publications.
• Pillsbury Winthrop Shaw Pittman LLP— A firm with a significant construction and insurance practice that has addressed builder’s risk coverage issues, including the completed operations cutoff and phased occupancy disputes. Search for their construction insurance articles.
• Merlin Law Group— Policyholder attorneys who have written on builder’s risk claims, including the distinction between faulty workmanship and resulting damage. Search for their blog posts on builder’s risk insurance.
• International Risk Management Institute (IRMI)— IRMI publishes detailed reference materials on builder’s risk coverage, including policy form analysis and coverage comparison guides. Search for “builder’s risk” on irmi.com.
• Policyholder-side coverage commentary— Published analyses from the national policyholder-side bar address builder’s-risk coverage disputes in the commercial construction context.
• FC&S / National Underwriter— The insurance industry’s authoritative coverage interpretation resource addresses builder’s risk policy provisions, including the testing exclusion and completion triggers.