Construction insurance protects financial expenditure during the erection phase of a home or a commercial building. Unlike homeowner's insurance that protects the property once it is occupied, construction insurance, frequently called Builders Risk policy, protects the developing structure and the materials purchased for the structure from loss due to damage or theft.
Purchased prior to starting the building process, this insurance policy covers a loss from damage due to fire, high winds or other factors not covered by the liability policy the contractor purchases. The insurance agency may ask for a copy of the home building contract before issuing a policy.
Builders risk policies are in force for the period of 1 year or upon completion of the home, whichever comes first. If this period is less than 1 year, the owner of the home may roll the remaining premium into a regular homeowner's policy or request a refund. If the home is still under construction at the end of the year, another policy will be issued.
Construction insurance will not cover the implied value of the structure; only the money expended to the point of the damage. If a homeowner is building a $100,000 home but spends only $60,000 when a tornado destroys the structure, he will receive $60,000, even if he feels the home has more value at that point in construction.
Homeowners may mistakenly think a contractor is liable for damage caused to a home under construction, but that is only true if the contractor or his workers were negligent, resulting in the damage. The homeowner must protect his investment with a builder's risk policy.
Homeowners should stay off the job to protect their financial interest in the structure. Most construction insurance policies exclude coverage for damage caused by the homeowner. Over-zealous owners may think they are helping the contractor by doing a little bit of the work themselves, but if their lack of building knowledge causes damage to the materials or the house, the insurance policy may not reimburse the loss.
If a storm damages the structure while under construction, the builder, even if he is under contract to finish the home, is likely to pull off the job unless the owner and builder renegotiate a new price that includes the additional work required to rebuild the home.