Builder’s Risk Insurance on a Ground-Up Construction Loan: What It Covers, and What Trips Up the File

A $620,000 ground-up build doesn’t get its first draw until the builder’s risk policy on file matches what the loan actually requires — and on a fair number of files, it doesn’t. The flip or rental policy a borrower already carries from a prior deal doesn’t extend to new construction, and a policy written on the wrong valuation basis can sit in underwriting for two weeks while the agent re-issues it. This is the part of a ground-up file that gets treated as paperwork until it’s the reason closing slips.

What builder’s risk actually covers, and what it doesn’t

Builder’s risk is a property policy written specifically for a structure under construction. It covers the materials, fixtures and partially completed structure against fire, wind, theft and vandalism from the day of the first draw until the certificate of occupancy. It does not cover the contractor’s liability for injury on site (that’s a separate general liability policy, usually the GC’s), and it does not cover the finished building once it’s occupied or rented — that’s when it converts to, or gets replaced by, a standard landlord or hazard policy.

Ground-up loans in this program run up to 80% LTC and 65% ARV, with a 650 minimum FICO and a requirement for three prior deals, including at least one completed ground-up build. That experience requirement exists partly because of files like this one: a first-time builder who doesn’t know a builder’s risk policy from a vacant-land policy is an underwriting red flag before the framing even starts.

What it actually costs, on a real budget

Premiums for builder’s risk run roughly 0.3% to 0.6% of the completed value of the structure (land value excluded), scaled by frame type, location and build duration — treat that range as indicative, not a quote, since every carrier prices it off its own underwriting. On a build with $650,000 in hard and soft construction costs and a projected 10-month timeline:

That $2,600 gets paid once, up front, for the full policy term — not monthly — and it’s a draw-schedule line item, not something most borrowers carry out of pocket separately. The number that actually moves the file isn’t the premium; it’s the valuation basis the policy is written on, which the next section covers.

What the policy has to say to actually satisfy the lender

Three things get checked before a builder’s risk certificate clears underwriting on this program:

• Completion value basis, not actual cash value. ACV pays out based on depreciated value at the time of loss — next to useless on a half-finished structure with no depreciation history. The policy has to insure to the completed value of the project, which is why the number on the certificate should track the ARV-based budget, not the as-is land value.
• Lender named as mortgagee and loss payee. Not just “additional insured.” A loss-payee designation means insurance proceeds on a covered loss go to pay down the loan balance before anything reaches the borrower, which is the position the lender is funding from.
• Coverage limit at or above the total loan amount, not just the hard construction cost. If the loan funds land acquisition plus a $650,000 build and the policy only covers the $650,000 structure, the gap between that number and the total funded amount is exactly the kind of thing a file gets kicked back for.

Soft-cost coverage (architect fees, permits, interest during a delay) is worth asking for but isn’t always required; the three items above are.

When builder’s risk is the wrong call

Not every project on this program needs it. A light-rehab fix-and-flip with no structural work — cosmetic updates, a kitchen, flooring — is insured under a standard vacant-dwelling or renovation policy instead; forcing a full builder’s risk policy onto a cosmetic rehab means paying for coverage the project doesn’t use, since there’s no frame-up, foundation or roof-off exposure to insure against. Builder’s risk earns its premium specifically on projects where the structure doesn’t exist yet or is torn down to the studs.

It’s also the wrong tool once the building is finished and occupied. A borrower who keeps paying a construction policy three months after the certificate of occupancy is paying for coverage against a type of loss — a half-built structure — that can no longer happen. The conversion to a landlord or vacant-property policy should happen at CO, not at refinance.

What actually trips up the file

The recurring problem isn’t the premium, it’s timing: most builder’s risk policies carry a 30 to 60 day vacancy or work-stoppage clause, and a permitting delay or a materials holdup that pushes the project past that window can lapse the policy without anyone noticing until the next draw inspection. On a build that’s already running behind, that’s the worst possible moment to discover the coverage isn’t active. Borrowers who’ve done this before build the stoppage clause into their draw-schedule buffer; first-time ground-up borrowers usually don’t, which is one more reason the program’s experience requirement exists.

Get the certificate of insurance in front of the lender before the first draw request, not after, and confirm the valuation basis and loss-payee language match what underwriting asked for the first time — a corrected certificate is a common, avoidable reason a ground-up closing slips a week. Details here are indicative and specific to this ground-up program; check current terms on the ground-up program page and see the required insurance documentation on the borrower forms page before submitting a file. For the other business-purpose programs this applies across, see the full programs overview.