Construction insurance I: builder's risk and property

Insurance is the main way the construction industry transfers risks that no party to the contract could reasonably carry alone: a fire that destroys a half-finished building, a flood that fills the excavation, a crane collapse that injures people on the street. This lesson covers the basic principles of insurance and the property side of a construction insurance program, centred on builder's risk insurance. Lesson 8 covers liability insurance, professional and pollution coverage, and wrap-up programs. Insurance policies vary widely, and the wording of the actual policy always governs; nothing here replaces advice from a licensed broker.

How insurance works

An insurance policy is a contract in which the insurer agrees to pay for specified losses in return for a premium. A few principles explain most of how construction insurance behaves.

Subrogation and its waiver are central to construction. Without a waiver, a fire caused by a subcontractor would be paid by the builder's risk insurer, which would then sue the subcontractor to recover its payment, defeating the purpose of a project-wide policy and setting the parties against each other. Standard contracts therefore require the property insurance to include all parties as insureds and require the parties to waive subrogation against each other for insured losses.

Insurance in Canada is regulated provincially, and brokers and insurers must be licensed in the province where they operate. The Insurance Bureau of Canada represents property and casualty insurers, and the Canadian Construction Documents Committee publishes CCDC 41, CCDC Insurance Requirements, which sets the insurance that CCDC contracts require. The 2020 edition of CCDC 41 accompanies CCDC 2-2020.

Builder's risk insurance

Builder's risk insurance, also called course of construction or construction all risks insurance, covers physical loss or damage to the work while it is being built: materials on site, materials in transit and stored off site, temporary works and the permanent work as it is installed. It is usually written on an all risks basis, meaning it covers every cause of physical loss except those specifically excluded.

Under CCDC 2-2020 and CCDC 41, the contractor normally provides a broad form property policy for the work, with the owner, contractor and subcontractors as insureds, in an amount not less than the value of the work, and keeps it in force until the work is complete. Owners may choose to buy it themselves, for example when they have a master property program.

Coverage typically ends at the earliest of substantial completion, occupancy or use by the owner, or the policy expiry date. Partial occupancy is a common trap: if the city moves library staff into part of Kingfisher Wharf before the pool is finished, the policy may require the insurer's consent or end for the occupied part. Owners and contractors should agree in advance who insures what during partial occupancy and obtain the endorsement before anyone moves in.

Common exclusions and extensions

The exclusions in a builder's risk policy matter as much as the coverage. Several are almost universal; others can be removed or limited by paying for an extension.

The defects exclusion is the source of many disputes. Insurers in many markets use standard clauses from the London Engineering Group, known as LEG 1, LEG 2 and LEG 3, to define how much of a loss caused by a defect is covered. LEG 1 excludes all loss caused by a defect, LEG 2 covers resulting damage but excludes the cost of what would have been needed to fix the defect before the loss, and LEG 3 excludes only the cost of improving the original defective design or workmanship. Owners and contractors on complex projects, especially those with innovative designs, usually negotiate for LEG 2 or LEG 3 wording.

Valuing the policy and paying the premium

The limit is normally set at the completed value of the project, including materials and labour but often excluding land, site preparation that cannot be damaged, and fees. Premiums are expressed as a rate per $100 (or per $1,000) of completed value for the project term, and depend on the type of construction, the location, the duration, the deductibles and the loss history of the contractor. Wood-frame residential projects pay much higher rates than concrete buildings because of fire risk; projects in flood or earthquake zones pay more for those perils.

Market conditions also move rates. Broker reports for 2026 described the construction insurance market as competitive for contractors with good loss records, with project builder's risk rates for non-high-hazard projects expected to move only slightly in 2027, while wood-frame and catastrophe-exposed projects faced closer underwriting. Rates quoted in this lesson are illustrative only.

Choosing a deductible

A higher deductible lowers the premium but leaves more of each loss with the insured. The right choice depends on the expected number and size of losses and on how much retained loss the project can absorb. Water damage, the most frequent builder's risk loss in many markets, typically produces many small and medium losses, so the deductible choice matters.

# Choosing a builder's risk deductible by expected annual cost (illustrative, seeded)
import numpy as np
rng = np.random.default_rng(41)
value = 48_000_000
options = {10_000: 0.150, 25_000: 0.128, 50_000: 0.112, 100_000: 0.098}   # deductible: rate per $100
YEARS = 20_000
total = {d: [] for d in options}
for _ in range(YEARS):
    n = rng.poisson(1.6)                          # expected losses over the project
    losses = rng.lognormal(mean=10.4, sigma=1.3, size=n)
    for d, rate in options.items():
        retained = np.minimum(losses, d).sum()
        total[d].append(value / 100 * rate + retained)
for d, rate in options.items():
    t = np.array(total[d])
    print(f"Deductible {d:>7,}: premium {value / 100 * rate:>8,.0f}  mean total cost {t.mean():>8,.0f}  P90 {np.percentile(t, 90):>8,.0f}")

Deductible  10,000: premium   72,000  mean total cost   86,829  P90  102,000
Deductible  25,000: premium   61,440  mean total cost   92,902  P90  131,616
Deductible  50,000: premium   53,760  mean total cost  103,842  P90  164,460
Deductible 100,000: premium   47,040  mean total cost  118,662  P90  219,818

In this illustration each step up in deductible saves less premium than it adds in expected retained losses, so the lowest deductible has the lowest mean total cost, and the 90th percentile shows how much worse a bad project can be with a high deductible. With a different loss pattern, for example fewer and smaller losses or larger premium discounts, the balance can tip the other way; the point of the exercise is to compare premium savings with expected retained losses rather than to choose the cheapest premium. The project team should choose a deductible it can afford to pay several times over, not just once, and should make clear in the contract who pays the deductible on each loss. Many contracts make the party responsible for the loss pay the deductible, which gives subcontractors an incentive to prevent losses.

Loss prevention and claims

Insurers expect insured parties to prevent losses, and many policies make specific measures conditions of coverage. On construction sites the most important are hot work controls (permits, fire watch and extinguishers for welding and cutting), water damage prevention (leak detection, staged testing of piping, shut-off procedures), fire protection during construction (standpipes, temporary heat safety, combustible waste removal), and site security. Wood-frame mid-rise projects have suffered many large fires during construction in both countries, and insurers now often require fire prevention plans, security patrols and camera monitoring as conditions.

When a loss occurs, the insured must give prompt notice, protect the property from further damage, document the loss with photographs and records, and cooperate with the insurer's adjuster. Repairs should not be completed before the adjuster has had a chance to inspect, unless delay would cause further damage. Under most contracts the contractor carries out the repairs as a change to the work, and the insurance proceeds flow to the owner or are held in trust for the parties according to the contract.