Builders Risk Insurance

A half-built house and a pallet of lumber sitting in the yard are not covered by a standard homeowners policy, which is why every construction project needs its own temporary property policy: builders risk insurance. The Insurance Information Institute also calls it a course of construction policy and notes it "may be available as a stand-alone policy, or as an add-on to your homeowners policy." It covers the partly built structure and the materials on the lot against losses like fire, monsoon wind and rain, theft of supplies, and vandalism. When the home is finished and occupied, the builders risk policy ends and a standard homeowners policy takes over.

How the coverage amount works

The coverage tracks the home's value as it rises. The Insurance Information Institute notes that a building under construction "has an ever-increasing value as more of it is completed." So the policy is usually written to the home's completed value. If a loss hits when the home is half built, a replacement-value policy pays about half of the finished value. A home three-fourths done is covered for three-fourths of its value. The coverage grows as the home does.

What it does not cover

Builders risk is property coverage. It leaves out the contractor's tools and equipment. It also does not cover liability if someone is hurt on the job site. Contractors carry general liability for that. Flood and earthquake are normally excluded too, just as on a homeowners policy. An Arizona lot in a wash or flood zone may need a separate endorsement.

How it is used in Arizona

On an Arizona construction loan, the lender requires a builders risk policy, with the lender named, before it releases the first draw. Either the owner or the builder can carry it, and the contract should say which. The Arizona Department of Insurance and Financial Institutions can confirm an insurer or agent is licensed in the state. For the full picture, see our FAQ on what builders risk insurance covers and who pays for it .