Builders Risk Insurance: 5 Coverage Gaps and Policy Misconceptions

• By: Olivia Overman
• November 10, 2025

As trusted advisors, insurance agents are keenly aware that protecting their clients from coverage gaps and misunderstandings in coverage is essential. For agents working within the builders risk insurance market, replacement valuation gaps are a prominent concern. However, several other gaps and misconceptions can leave clients vulnerable to significant financial burdens.

Here are five things to highlight for clients seeking coverage:

1) Risk spread. While every carrier offers nuances in its builders risk coverage, unless a client is going into a specific area, the nuances may not be significant.

Yet “if a client is going into a very catastrophe-prone area, then the agent becomes crucial in understanding those differences in coverages,” says Mark Gromek, chief marketing and underwriting officer, Builders. “Agents can advise their clients on what that exposure may look like and also how deductibles play a role in their strategy.”

Particularly for custom home builders, “getting that type of advice from their agent and understanding that if you’re going to build many homes in a more CAT-prone area that are all clumped together, you may have a harder time insuring those,” Gromek says.

2) Property policy only. Agents can ensure clients comprehend that a builders risk policy covers property while it’s in the course of construction or renovation to help ensure they can secure other types of coverage for other losses.

When it comes to job site safety and security, a liability policy will cover “somebody wandering on and tripping and falling,” Gromek says. “Having good job site management and strong safety and security protocols around site areas is something that agents can really make an impact by giving clients advice and truly being their risk manager who can identify hazards that need to be covered.”

3) Soft costs. “One of the more challenging things to really understand is what’s called soft costs,” says Scott Chamoff, senior director, inland marine middle market, Nationwide. “These are the time element costs, such as the impact of delay-related expenses like construction, loan interest, marketing and architectural engineering fees.”

Crucially, the definition differs between the builders risk market and the construction industry and is an important misunderstanding that agents can highlight for clients. “Soft costs can include, from a construction standpoint, things like profit, while on a builders risk policy form, we’re not talking about profit, we’re talking about more continuing expenses,” Chamoff explains. “An agent who can really walk their insured through this coverage, which is called soft cost, is important.”    

4) Performance testing. Losses during testing of equipment, such as HVAC systems, are often excluded under a builders risk policy.“There’s some confusion around testing coverage in terms of what type of testing is being offered and what type of testing is not being offered,” Chamoff says. “Having that squared away with an underwriter before binding a policy is key to ensuring that everybody is clear from the get-go what type of testing is covered.”

For example, “if you are testing things like introducing fuel or feedstock into a generator or into some kind of a turbine, that’s generally not going to be covered under the limits for testing in a traditional builder’s risk policy,” Chamoff explains. “If you are installing very sophisticated manufacturing equipment or medical equipment, the agent will really want to understand the extent of coverage they have for the performance testing of that equipment while it’s being installed and tested during that period.”

5) Flood and earthquake exclusions. While traditionally excluded from a builders risk policy, agents can advise clients to purchase flood coverage. “I don’t say they should buy full limits, but they should buy an appropriate limit and should consult with their agent about what that appropriate limit should be,” Chamoff says. “Another area agents can highlight is water damage in its various forms, including sewer backup or a construction project that’s not dried and damaged, because it is still exposed to the elements.”

Olivia Overman is IA content editor.