Who Should Purchase Builders Risk Insurance: The Owner or the Contractor?

Builders risk insurance, also known as course of construction insurance, is a specialized property insurance policy designed to protect buildings and structures while they are under construction, renovation, or repair. It covers risks such as fire, theft, vandalism, wind damage, and other perils that could halt progress or cause financial loss during the building process. But a key question arises in every construction project: Who should foot the bill for this coverage—the property owner or the general contractor? The answer isn’t one-size-fits-all; it depends on factors like the project’s scale, contractual agreements, financial interests, and risk management strategies. In this article, we’ll explore the roles of both parties, the pros and cons of each purchasing the policy, and why one might be preferable over the other in certain scenarios.

Understanding the Basics of Builders Risk Insurance

Before diving into who should buy it, it’s essential to grasp what builders risk covers. This policy typically insures the building itself, including materials, fixtures, and equipment on-site or in transit. It can also extend to soft costs like additional interest on loans due to delays or lost rental income. Exclusions often include earthquakes, floods (unless added via endorsements), faulty workmanship, and wear and tear. Premiums are generally 1-4% of the total project value, influenced by location, duration, and risk factors.

The policy’s named insured is the party with a direct financial interest in the project. Additional insureds, such as lenders or subcontractors, can be added to ensure broad protection. Ultimately, the decision on who purchases it stems from who bears the most risk and who wants control over claims and coverage.

When the Property Owner Should Purchase Builders Risk Insurance

In many cases, the property owner is the ideal party to secure builders risk insurance because they ultimately own the asset and stand to lose the most if disaster strikes. For instance, if a fire destroys half of an unfinished building, the owner is left with the financial burden of rebuilding, potential loan defaults, or lost future revenue. This is especially true for owners without other properties to insure, such as individual homeowners undertaking a remodel or a developer building a single commercial site.

Advantages for the Owner

• Control Over the Policy and Claims: As the first named insured, the owner manages reporting, adjustments, and settlements. This is crucial for covering business income losses or delays, where sensitive financial details (like loan terms or rental income) must be shared. If the contractor buys the policy, the owner might only be listed as a loss payee, giving them secondary status and no notification of cancellations.
• Tailored Coverage: Owners can customize the policy to include endorsements for high-risk perils like floods or earthquakes, ensuring it aligns with their long-term interests, such as protecting against income loss that contractors might not have an insurable interest in.
• Lender Requirements: Banks or financiers often mandate that the owner provide proof of insurance to secure loans, as covenants are between the owner and lender, not the contractor.
• Asset Protection: Since the owner provides the capital, it makes sense for them to structure coverage to safeguard their investment fully.

This approach is common in residential remodels or when the owner has no ongoing relationship with multiple contractors. For Harley in Atlanta, where weather events like hurricanes or severe storms can pose risks, an owner-purchased policy might offer peace of mind by allowing direct oversight of weather-related endorsements.

Potential Drawbacks

The main downside is cost—owners must pay premiums upfront, which could strain budgets on large projects. Additionally, if the contract shifts responsibility to the contractor, the owner might face gaps if the contractor’s policy is inadequate.

When the General Contractor Should Purchase Builders Risk Insurance

On the flip side, general contractors often purchase builders risk insurance, particularly on larger or commercial projects where they manage multiple subcontractors and daily operations. Contractors have a vested interest in the work in progress, as delays or damages could lead to liability claims, increased costs, or reputational harm.

Advantages for the Contractor

• Operational Control: Contractors oversee the site, so holding the policy allows them to address issues quickly, like material theft or weather damage, without waiting for owner approval. This aligns with their control over other project aspects, such as scheduling and safety.
• Existing Programs: Many contractors have ongoing insurance programs that include builders risk, potentially offering better rates or bundled coverage for tools and equipment. This can be more convenient and appear cheaper for the owner.
• Broad Stakeholder Coverage: Policies can extend to subcontractors, suppliers, and others, simplifying compliance with contract requirements.
• Risk Management Expertise: Contractors are often more familiar with construction-specific risks and can negotiate policies that cover on-site perils effectively.

This is prevalent in scenarios where the contractor is hired for turnkey projects or has a history of providing such coverage.

Potential Drawbacks

Contractors might exclude certain coverages, like business income loss, since they lack an insurable interest in the owner’s future earnings. Additionally, if the owner isn’t properly named, they could lose control over claims, leading to disputes.

Factors to Consider in Deciding Who Buys the Policy

The choice boils down to the construction contract—often using standard forms like those from the American Institute of Architects (AIA), which specify insurance responsibilities. Key considerations include:

• Project Type and Size: For small remodels, owners might handle it; for complex commercial builds, contractors often do.
• Financial Stakes: Whoever has the greatest exposure should lead.
• Relationship Dynamics: In owner-builder scenarios, the owner buys it; in GC-led projects, the contractor might.
• State Regulations: In Georgia, for example, insurance requirements can vary by municipality, but generally, it’s contractual.
• Cost and Convenience: Weigh premiums against control and coverage quality.

Both parties can be named insureds if they share financial interests, providing joint protection.

Conclusion: It’s All About the Contract and Collaboration

There’s no universal rule on whether the owner or contractor should purchase builders risk insurance—it’s a negotiated decision best outlined in the contract to avoid disputes. Owners often benefit from buying it for control and comprehensive protection, while contractors excel in operational efficiency. Whichever path you choose, consult an insurance broker or attorney to tailor the policy to your needs. In high-risk areas like Atlanta, proactive coverage can prevent minor setbacks from becoming major financial headaches. By aligning insurance with project goals, all parties can build with confidence.