Builder’s risk insurance in Canada

What does builder’s risk insurance cover?

During construction, a property faces risks that usually don’t exist once a building is finished and occupied. Parts of the structure may be exposed, materials may be stored on site or nearby and security or fire protection systems may not yet be fully in place. That’s what builder’s risk insurance is for. A builder’s risk insurance policy may cover damage caused by common construction-phase risks, including:

• Fire

• Lightning strikes

• Wind and hail damage

• Explosions

• Theft and vandalism during construction

Most builder’s risk insurance policies are written on an “all-risks” basis, meaning they cover physical damage unless it’s specifically excluded in the policy. If one of these events occurs, it may help cover the cost to repair or replace what was damaged, allowing the project to keep moving forward instead of stalling. If a covered loss does occur, a builder’s risk policy may help pay for:

• Repair or replacement of damaged building materials

• Physical damage to the structure that’s still under construction

• Debris removal, if needed to clean up the site

• Certain professional costs, such as engineering, architectural or legal fees, if required to restart or adjust the work

It’s important to understand that builder’s risk insurance generally covers the project as it stands at the time of the loss, not the finished building. Further, coverage can vary by insurance provider and project type, so it’s best to review your policy or speak with your broker to find out what is and isn’t covered.

Types of costs in a builder’s risk policy

Construction projects tend to involve a mix of direct and indirect expenses, often referred to as hard costs and soft costs. Here’s what you need to know about how these costs are treated under a builder’s risk policy when setting insurance limits.

Hard costs

Hard costs, sometimes called direct costs, generally include the physical elements required to complete the project. This can include:

• Construction materials

• Labour

• Equipment used in the build

• Supplies that become part of the finished structure

Example: A windstorm damages framing materials on a commercial build. The construction company needs to buy new lumber to replace it and pay for extra labour to reinstall it to bring the structure back to its pre-loss stage of construction. Builder’s risk insurance helps cover the added costs.

Soft costs

Soft costs are indirect expenses that don’t relate to the physical construction itself but are still essential to the project. These may include real estate taxes, architectural and engineering fees, developer’s fees, interest on construction loans, accounting and legal fees, inspection costs and additional insurance expenses if a project is delayed.

Note: Soft costs are not always included automatically under a standard builder’s risk insurance policy, so you may need an endorsement to insure these expenses.

Example: A fire breaks out at a residential development and delays construction. As a result, the project requires new permits, updated drawings, extended financing and additional professional services to move forward. Without the right coverage in place, the project owner may have to cover them out of pocket.

When does builder’s risk insurance coverage start and end?

Ideally, you want to have builder’s risk insurance in place before construction begins and often before any materials start arriving on site. Any losses that occur before the policy start date are generally not covered, which means if you don’t arrange for coverage early enough, you could leave the project exposed during the early stages, like site preparation, material delivery or even the initial framing.

Coverage generally applies while construction is actively underway and is intended to protect the project only for a defined period. Builder’s risk insurance usually ends at the earliest of:

• Project completion, as defined in the policy

• Occupancy or use of the building, even if minor work is still ongoing

• Transfer of ownership

The point at which a project is considered complete can vary depending on the insurance company and the policy. In some cases, coverage may end once the building is largely but not fully finished. That’s why it’s important to confirm how “completion” is defined before construction begins.

Also, if any construction timelines change, it’s very important that you notify your broker as soon as possible. While delays in construction are fairly common, whether due to weather, supply chain issues or labour availability, if a project runs longer than expected, you may need to add an extension endorsement to maintain coverage. The same goes for any testing or commissioning of systems after the original end date, including HVAC, electrical or fire protection.

Who typically buys builder’s risk insurance?

Builder’s risk insurance is most often purchased by the property owner or developer, since they usually have the greatest financial interest in the completed project. However, in some cases, the general contractor may set up the policy on the owner’s behalf, depending on how responsibilities are set out in the construction contract.

Regardless of who buys the policy, it’s important that everyone involved in the project, such as owners, general contractors and subcontractors, is properly named as either insured or additional insured in the policy to avoid any disputes if a claim needs to be made.

What is not covered by builder’s risk insurance?

Builder’s risk insurance covers a lot during construction, but it doesn’t cover every type of loss. Some situations are excluded or may require additional coverage. Let's take a look:

Keep in mind that coverage, exclusions and available endorsements can vary by insurer and province. Reviewing the policy wording with your insurance broker can help make sure there are no coverage gaps for your specific project.

Wrap-up liability coverage

In addition to builder’s risk insurance, some construction projects use wrap-up liability coverage to handle liability risks on a specific job site.

A wrap-up liability policy works much like commercial general liability insurance, but instead of covering one company, it typically applies to the entire project, including the project owner, the general contractor and the subcontractors working on the site. This means that when a claim happens, it can be handled under the wrap-up policy rather than each company’s own liability insurance.

Blanket builder’s risk coverage

Some contractors may qualify for blanket builder’s risk coverage, which allows multiple projects to be insured under a single policy for a defined period, such as one year. Instead of setting up a new policy every time a project starts, blanket coverage can help make things easier if you’re working on multiple jobs throughout the year.

That said, blanket builder’s risk coverage isn’t necessarily suitable for every contractor or project type. A BrokerLink commercial insurance advisor can help you decide whether blanket coverage makes sense for how you operate.