What Is Builder's Risk Insurance?
Builder's risk insurance is the policy you need during BRRRR rehab — not a rental policy, not a homeowner's policy. If your property is under active renovation and you file a claim on a standard policy, the insurer will deny it. That's not a hypothetical — one BiggerPockets investor lost $16,000 on a Jacksonville BRRRR when a car crashed into the property during rehab and the rental policy didn't cover it. Builder's risk typically costs 1-5% of your construction budget, covers 3-12 months, and protects the structure, materials, and new work from fire, theft, vandalism, and weather damage.
A specialized insurance policy that covers a property during renovation or construction, protecting against damage, theft, and liability — distinct from a standard rental or homeowner's policy.
At a Glance
- Covers properties during active renovation or construction — standard policies don't
- Protects the structure, materials (on-site and in transit), new work, and temporary structures
- Costs 1-5% of total construction budget, typically for 3-12 month terms
- Standard homeowner's or rental insurance policies exclude losses during active renovation
- Hard money lenders often require builder's risk as a loan condition
- Property owner should be named insured to maintain control over claim payouts
How It Works
When you buy a property for BRRRR or a flip, there's a gap between purchase and when the property is habitable. During that gap — while walls are open, contractors are on-site, and the property is vacant — your standard insurance doesn't apply. Builder's risk fills that gap.
The policy covers the existing structure, all new construction work, building materials (whether on-site, in storage, or in transit), and temporary structures like scaffolding and fencing. Covered perils typically include fire, lightning, wind, hail, theft, vandalism, and certain water damage. Debris removal after a covered loss is usually included too.
You buy the policy before rehab starts and it runs for the duration of the project — typically 3-12 months, with extensions available if the project runs long. Coverage amount should equal the completed value of the project (not just the rehab budget), because a total loss means losing both the structure and the renovation work.
What it doesn't cover: pre-existing damage, normal wear and tear, defective workmanship or design, earthquake and flood (unless added as endorsements), employee injuries (that's workers' compensation), and damage from your own negligence. If your contractor's shoddy work causes a pipe burst, builder's risk won't pay for the bad work — it pays for the resulting water damage to materials and finishes.
Most hard money lenders require builder's risk as a condition of the loan. Makes sense — the property is their collateral, and they want it protected during the highest-risk phase of ownership.
Real-World Example
You buy a 3-bedroom SFR in Memphis for $90,000 and plan a $38,000 rehab with a target ARV of $160,000. Your hard money lender requires builder's risk insurance before the first draw.
You get a 6-month builder's risk policy through your insurance agent. Coverage amount: $160,000 (the completed value). Premium: 2.5% of your $38,000 construction budget = $950 for the full 6-month term. The policy names you as the insured, your hard money lender as the loss payee, and your GC as an additional insured.
Three months into rehab, a severe storm rips off a section of the roof you hadn't replaced yet. Rain damages the new kitchen cabinets, LVP flooring in two rooms, and drywall. Total damage: $8,400 in materials and labor to redo the affected work, plus $1,200 for temporary tarping and debris removal. You file a claim on your builder's risk policy. After a $1,000 deductible, the insurer pays $8,600.
Without builder's risk, that $9,600 loss comes out of your pocket — and your contingency buffer just evaporated in one storm. Your $950 premium saved you $8,600.
Pros & Cons
- Fills the insurance gap during renovation when standard policies won't cover losses
- Covers materials, new work, and the existing structure — not just the building shell
- Relatively cheap: 1-5% of construction budget is a small price for protection against $10,000+ losses
- Satisfies hard money lender requirements, allowing your loan to close
- Materials in transit coverage protects against theft of supplies being delivered to the job site
- Adds cost to an already tight rehab budget — $500-$2,000 on a typical residential project
- Doesn't cover defective workmanship — if your contractor does shoddy work, that's not a covered loss
- Deductibles typically run $1,000-$2,500, so small claims aren't worth filing
- If the project extends beyond the policy term, you'll pay for an extension or risk a coverage gap
- Not all perils are included by default — flood, earthquake, and mold often require endorsements at additional cost
Watch Out
The #1 builder's risk mistake: not having it at all. Some investors assume their rental policy or homeowner's policy covers the property during renovation. It doesn't. Standard policies contain exclusions for vacant properties and properties under construction. If you file a claim on a standard policy during an active rehab, the insurer will investigate, discover the renovation, and deny the claim. You're out the deductible AND the repair costs.
The #2 mistake: insuring for the rehab budget instead of the completed value. If you insure a $38,000 rehab but a fire destroys the entire structure (worth $160,000 after renovation), a policy capped at $38,000 leaves you massively underinsured. Coverage should equal the property's completed value.
Don't let the policy lapse between the end of rehab and when your standard landlord policy kicks in. There's often a 2-4 week gap between "rehab complete" and "tenant moves in" — make sure either the builder's risk policy or the landlord policy covers that window. A gap in coverage during that period means you're self-insuring, and that's when Murphy's Law strikes.
Ask an Investor
The Takeaway
Builder's risk insurance costs $500-$2,000 on a typical BRRRR rehab. Skipping it to save that amount is one of the worst risk-reward calculations in real estate investing. One storm, one fire, one theft of materials on-site, and you're looking at $5,000-$50,000 in uninsured losses. Get the policy before rehab starts, insure for the completed value, make sure it covers the full project timeline plus a buffer, and name every party with a financial interest. It's the cheapest protection you'll buy on the entire deal.