What is Builder’s Risk Insurance?

Builder’s Risk Insurance is specialized property insurance that protects a building under construction or major renovation, covering damage from fire, theft, vandalism, and weather during the construction period.

What you need to know

If you’re building a new restaurant or doing a major renovation (like gutting and rebuilding the kitchen), standard property insurance won’t cover the work in progress. Builder’s risk fills this gap until the project is complete.

How builder’s risk insurance works:

Builder’s risk is a temporary policy that covers:

• Building structure under construction or renovation
• Materials and supplies on-site waiting to be installed
• Fixtures and equipment being installed
• Contractor’s tools and equipment (if specified)
• Temporary structures like scaffolding, fencing, and temporary offices
• Debris removal after a covered loss

Coverage period:

• Starts: When construction begins or materials arrive on-site
• Ends: When project is substantially complete, certificate of occupancy issued, or you take possession
• Typical duration: 6-18 months, extendable if needed

What builder’s risk covers:

Covered perils typically include:

• Fire and lightning – Most common construction loss
• Wind and hail – Damage before building is fully enclosed
• Theft and vandalism – Materials, equipment, fixtures stolen or damaged
• Collapse – Structural failure during construction
• Water damage – From burst pipes, rain through openings
• Malicious mischief – Intentional damage by third parties

What’s typically NOT covered:

Standard exclusions:

• Design defects – Faulty plans or specifications
• Defective workmanship – Poor construction quality (though resulting damage may be covered)
• Wear and tear – Normal deterioration
• Mechanical breakdown – Equipment failure without external cause
• Employee theft – Stolen by your workers or contractor’s employees
• Earthquake and flood – Require separate endorsements
• War and terrorism – Usually excluded unless specifically added

Who needs builder’s risk insurance:

New construction:

• Building a restaurant from the ground up
• Converting another building type into a restaurant
• Adding a new structure to existing property

Major renovations:

• Gut renovation – Stripping interior to studs and rebuilding
• Kitchen rebuild – Complete removal and replacement of kitchen systems
• Structural changes – Moving walls, adding floors, roof replacement
• Major systems replacement – All new HVAC, electrical, plumbing

Minor work typically doesn’t need builder’s risk:

• Cosmetic updates (paint, flooring, décor)
• Equipment replacement without structural work
• Small repairs and maintenance

Who purchases the policy:

Builder’s risk can be purchased by:

• The owner (you) – Most common for restaurant owners
• The general contractor – Sometimes required by contract
• The lender – Bank financing the project may require and purchase it

Critical decision: Clarify in your construction contract who is responsible for obtaining and paying for builder’s risk coverage. Don’t assume the contractor has it.

Why it matters for restaurant owners

Construction projects represent huge investments—often hundreds of thousands of dollars. A fire during construction could destroy all that work with no insurance payout if you don’t have builder’s risk coverage.

The financial exposure is severe:

Typical restaurant construction/renovation costs:

• Minor renovation: $50,000-$150,000
• Major renovation: $200,000-$500,000
• Ground-up construction: $500,000-$2,000,000+
• High-end buildout: $2,000,000-$5,000,000+

Common construction losses:

• Fire during construction: $100,000-$1,000,000+ in damage
• Theft of materials/equipment: $25,000-$100,000
• Water damage from storm: $50,000-$200,000
• Vandalism: $10,000-$75,000
• Collapse: $200,000-$500,000+

This policy protects your investment until you can open and switch to standard property coverage.

Real-world scenario:

You’re doing a $400,000 kitchen renovation:

• Gutting existing kitchen completely
• Installing new hood system, gas lines, electrical
• All new commercial equipment
• Structural changes to accommodate walk-in coolers

Month 3 of construction: Electrical fire breaks out overnight, destroying:

• $150,000 in completed work (framing, electrical, plumbing)
• $80,000 in equipment staged for installation
• $50,000 in contractor’s tools and supplies
• Total loss: $280,000

Without builder’s risk: You pay the entire $280,000 out-of-pocket to restart, plus project delays cost another $50,000 in lost opening revenue.

With builder’s risk: Insurance pays the $280,000 claim (minus deductible), you’re back on schedule, project completed on time.

Coverage limits and costs:

Setting the right limit: Your builder’s risk limit should equal the total completed value of the project:

• Construction costs (labor and materials)
• Your owned equipment being installed
• Permit and plan fees
• Debris removal and cleanup
• Architect and engineering fees

Typical premium rates:

• 1-4% of total project cost depending on:
  • Project type and size
  • Construction methods and materials
  • Location and crime rate
  • Fire protection availability
  • Contractor experience and safety record

Example costs:

• $200,000 renovation: $2,000-$8,000 premium
• $500,000 buildout: $5,000-$20,000 premium
• $1,000,000 new construction: $10,000-$40,000 premium

Essential coverage considerations:

Make sure it covers your contractor’s equipment and materials too. Some policies only cover your property, leaving contractor’s tools and materials unprotected. You want a policy that covers:

• Materials on-site – Even if still owned by supplier
• Equipment being installed – Your property and contractor’s
• Contractor’s tools – Especially expensive specialized equipment
• Temporary installations – Scaffolding, temporary power, fencing

Verify who’s responsible for purchasing the policy (you or your contractor). This should be clearly specified in your construction contract:

If contractor provides coverage:

• Verify adequate limits for full project value
• Ensure you’re named as additional insured
• Request certificate of insurance before work starts
• Confirm coverage includes your materials and equipment

If you provide coverage:

• Purchase before construction begins
• Ensure contractor and subcontractors are covered
• Include contractor’s equipment and tools
• Verify it covers all work at the site

Additional important provisions:

Soft costs coverage: Many builder’s risk policies can add coverage for:

• Delayed opening – Lost revenue while you wait to open
• Extra expenses – Expedited construction to open on time
• Loan interest – Continuing interest payments during delays
• Property taxes – Ongoing taxes while construction delayed

Ordinance or law coverage: If damage occurs, current building codes may require:

• Upgrades beyond original plans – New fire suppression, accessibility
• Demolition of undamaged portions – Code requires tearing down more than damaged area
• Increased construction costs – Building to new standards costs more

Without this endorsement, you pay these extra costs out-of-pocket.

Testing and commissioning: Ensure coverage includes the testing period when:

• Equipment is being tested and calibrated
• Systems are brought online
• Initial production runs are conducted
• Staff training is occurring

Many losses occur during this critical phase.

Common mistakes to avoid:

Assuming contractor has coverage: Never assume. Verify coverage exists, confirm limits, get certificate naming you as additional insured.

Underinsuring the project: Don’t just insure hard construction costs. Include:

• Architect and engineer fees
• Permit and inspection fees
• Your equipment and furnishings
• Debris removal
• Potential soft costs

Not updating the policy: If project costs increase due to change orders, immediately increase your builder’s risk limit. Otherwise, you’ll be underinsured if loss occurs.

Letting coverage lapse: Builder’s risk ends when project is “substantially complete.” If delays push completion past policy expiration, extend the policy—don’t leave yourself unprotected.

Ignoring certificates of occupancy timing: Coverage often terminates when certificate of occupancy is issued, even if you haven’t moved in yet. Coordinate carefully to avoid gaps.

Essential practices:

• Purchase before work begins – Coverage should start when materials arrive or work commences
• Verify contractor’s coverage or buy your own – Don’t assume, confirm in writing
• Set appropriate limits – Full project value including all costs
• Add soft costs coverage – Protects against business interruption during delays
• Include ordinance or law coverage – Protects against code upgrade costs
• Name all parties correctly – Owner, contractor, lender all properly listed
• Document everything – Photos, receipts, invoices for all work and materials
• Update for change orders – Increase limits immediately when project costs rise
• Maintain during testing – Ensure coverage extends through commissioning
• Coordinate with property insurance – Smooth transition when project completes
• Review exclusions carefully – Know what’s not covered and consider endorsements

When the project completes:

Builder’s risk ends when:

• Project is substantially complete (usually 90-95% done)
• Certificate of occupancy is issued
• You take possession and begin operations
• Policy expiration date arrives

At this point, you must have standard property insurance in place immediately. Don’t let a coverage gap occur between builder’s risk ending and property insurance starting.

Bottom line: If you’re investing $100,000 or more in construction or renovation, builder’s risk insurance is essential protection. The relatively small premium (1-4% of project cost) protects you from devastating losses that could bankrupt your restaurant before it even opens. Make sure you understand who’s providing the coverage, what’s included, and that limits are adequate for your total project investment.