New construction insurance, also known as builders risk insurance, covers your new home build or home renovation project during the construction phase. Either the property owner or the contractor will be responsible for purchasing new construction insurance before the project begins. As such, it’s vital that you determine who will buy coverage before moving forward with construction efforts.
Who Needs New Construction Insurance?
Anyone with a financial stake in the new construction of a home or a major home renovation needs financial protection against losses that may occur during construction. Generally, this means new construction insurance is suited for the following scenarios:
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You are building a new construction home from the ground up.
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You are performing a long-term home renovation that is not covered by your home insurance policy.
Keep in mind that the contractor performing the work may be the one to buy new construction insurance. In that case, you don’t need to do anything, but you’ll want to verify who is responsible for securing coverage before the project begins.
What Does New Construction Insurance Cover?
New construction insurance temporarily covers your home during the construction or renovation phase. It provides financial protection against similar perils covered by a traditional home insurance policy, such as wind, lightning, hail, fire, theft, and vandalism.
While coverage isn’t standardized across insurers, new construction policies may cover the following types of losses:
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The building’s structure. Any losses or damages caused to the actual structure of the building by a covered peril may be covered by a new construction insurance policy.
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Building materials. A new construction insurance policy might cover on-site building materials, tools, or equipment. This can include materials or equipment that are in transit or stored at a temporary off-site location.
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Indirect costs caused by delays. Your policy may cover some indirect costs caused by project delays, such as the cost to extend building permits after a major storm holds up the project. Typically, you need to buy an endorsement to cover these types of “soft costs.”
For example, imagine a fire breaks out on the construction site while your home build is underway. New construction insurance could cover the cost of rebuilding the parts of the home that were damaged, as well as replacing any tools and equipment that were destroyed.
What’s Not Covered?
New construction insurance typically won’t cover the following:
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Liability. If someone gets injured onsite or a third party’s property gets damaged during the construction project, the contractor’s general liability insurance, not the new construction insurance, should handle the resulting losses.
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Policy exclusions. Perils that aren’t covered by new construction insurance may include floods and earthquakes, employee theft, losses stemming from vehicle accidents, manufacturing flaws or shoddy workmanship, or ordinary wear and tear.
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Losses after construction finishes. Once the project is complete, new construction insurance no longer covers any losses or damage to your home. For that, you will need a traditional home insurance policy.
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Existing structures. If a peril causes damage to both the build site and pre-existing structures, new construction insurance will not extend to the pre-existing property.
Additional Insurance to Consider for New Construction
New construction insurance isn’t the only type of coverage you should consider or may need during the building phase. Other important types of coverage include:
General liability insurance
The contractor should have general liability insurance. This protects the builder from financial losses related to bodily injury or property damage, such as medical bills or legal fees when someone gets injured on the construction site.
Workers’ compensation
Employers above a certain size are legally required to have workers’ compensation insurance. This covers medical expenses and lost wages for employees who are injured on the job, as well as providing coverage for the employer's legal costs.
Tools and equipment insurance
Contractors can protect their tools and equipment with tools and equipment coverage, no matter where their portable property is used. Companies that frequently travel with tools to job sites and/or store equipment at secondary locations can use this coverage to minimize losses from theft, vandalism, and other risks.
How Much Does New Construction Insurance Cost?
The average cost of new construction insurance is between 1% and 4% of the total cost of the construction project. However, the actual cost can fluctuate due to various factors.
Factors affecting cost:
The following factors can affect the cost of new construction insurance:
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Local coverage requirements. Local regulations that mandate new construction insurance may also specify a minimum coverage amount; the higher that minimum, the more your coverage may cost.
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Locational risks. If your construction project is taking place in a higher-risk area — such as a region at risk for hurricanes, or a high-crime area — you may have to pay more for coverage.
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Project scope. The larger the project and the longer it takes to complete, the more opportunities there are for problems. Insurers may charge more for extensive or lengthy construction projects.
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Type of construction materials. High-quality construction materials will cost more to replace and may increase the price of new construction insurance.
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Coverage limits and deductibles. The policy’s coverage limit and deductible have a direct impact on insurance costs. The higher the coverage limit, the more expensive the policy will be. The higher the deductible, the cheaper the policy.
When Should You Buy New Construction Insurance?
You will need to have new construction insurance in place before work begins. If local guidelines require new construction insurance, you may need to provide a copy of your policy to secure building permits. And if you’re financing the home build with a construction-to-permanent loan, your lender may require proof that you have coverage in place before it will fund your project.
When Does New Construction Insurance End?
You want your policy to remain in effect until the construction project is completed. New construction policies often come in intervals that last as short as three months or as long as 12 months. Of course, figuring out how long a construction project will take can get tricky, but you can usually extend your policy if you encounter delays.
How to Get New Construction Insurance
Your construction contract should outline who is responsible for securing new construction insurance. If that responsibility falls on you, you will want to start shopping early to ensure you have coverage when you need it.
Work with an agent who specializes in builders risk or construction policies
Look for insurance providers that specialize in builders risk or new construction insurance, with experience in covering residential projects. You want the insurer to understand the challenges, risks, and issues surrounding home construction projects in your area.
Be ready to provide construction timelines, plans, and budget
When buying new construction insurance, you will need to give details about yourself, the contractor, and the project. You or the contractor may also need to provide project details, including the site plan, project schedules, budgets, and other relevant information.
Compare quotes and coverage options
Since new construction insurance isn’t one-size-fits-all, you will want to shop around with a few providers to compare prices and coverage. As much as you can, look for an apples-to-apples comparison of policies with similar coverage limits, deductibles, and types of coverage.
Make sure to review what counts as a covered peril (the type of loss that the policy will cover) and what counts as an exclusion (the type of loss that the policy won’t cover).