Builders Risk for Tract and Production Homes

Most tract programs are written on a reporting basis. The builder files a report, usually monthly, listing each house started in the period with its lot, plan and completed value. It also lists houses that closed or were otherwise removed. Premium is charged on the values reported, often with a deposit at inception and an adjustment at audit. Some programs charge on starts; others charge on the average value at risk.

The report is not an administrative afterthought. Depending on the wording, a house that was started but never reported may be insured only up to a limited amount or not at all. A value reported below actual cost may also reduce what a partial loss pays. Builders with several divisions should assign one person to reconcile the starts schedule from the purchasing or scheduling system to the insurance report before it is filed.

Per-house values are usually set by floor plan and elevation, plus lot-specific options such as pools, casitas, solar or upgraded finishes. Ask whether options and structural upgrades must be reported individually or are absorbed in the plan value, and whether the policy allows a margin for cost escalation between start and completion.

Builders risk is priced for houses under construction. Once a house is finished, the policy may still insure it, but often only for a stated period. Many programs carry a completed-but-unsold provision that keeps a finished spec home insured for a set number of days after completion, sometimes with tighter terms for vandalism, theft, glass breakage and water damage once the house is vacant. After that window, coverage may end or require a separate vacant dwelling or builder's inventory policy.

Presold homes raise a different question: whose interest is insured if the buyer has signed a purchase contract but escrow has not closed. Builders risk generally continues to protect the builder's interest until title passes, but the purchase agreement may shift risk of loss earlier or later. Read the risk of loss clause in your standard purchase contract against the policy's end-of-coverage wording.

Market cycles make this more than a footnote. When sales slow, inventory homes can sit finished for months. Track completion dates by lot and ask the insurer what notice or reporting is needed to keep finished inventory insured past the standard window.

Models are houses the builder will eventually sell, but for a year or more they are furnished, staffed and open to the public. Tract programs vary widely here. Some exclude models once they open, some allow them for a stated period with a separate per-model limit and some move them to the builder's property policy. Furnishings, artwork, signage and sales office equipment usually belong to the builder's business property, not builders risk.

Ask the insurer to list models by lot in the report and confirm their status in writing. When the community sells out and the models are sold, they leave the program like any other house, often after a refresh of finishes and a new completion date. Our partial occupancy article covers the occupancy handoff in more depth.

In a for-sale community, the normal end of builders risk on a house is the close of escrow. The builder reports the closing, the house leaves the program and the buyer's homeowners policy takes over from the recording date. Gaps appear when the buyer moves in early under an occupancy agreement, when closing is delayed after the final walk-through or when a house closes to an investor or build-to-rent buyer that has not bound its own policy.

Bulk sales deserve their own review. When a builder sells a block of finished homes to a single-family rental operator, the purchase agreement sets the transfer date and the buyer's property program has to be bound before it. A build-to-rent developer building homes to hold, rather than sell, needs a different structure, because there is no closing to end coverage house by house.

Tract communities are open sites with many houses empty at night. Appliance, HVAC condenser and copper wiring theft are recurring losses, and many programs limit theft of materials not yet installed or require fencing, lighting or cameras in the phase. Read whether installed appliances count as part of the house or as stored materials until the house closes.

The larger financial question is a single event that damages many houses. A hailstorm across a North Texas phase, a wind event during roofing in metro Phoenix or a wildfire at the edge of an inland California community can touch dozens of lots in an afternoon. Ask whether the deductible applies per house, per occurrence or per location, and whether there is an aggregate cap on deductibles for one event. On the Texas coast, properties in the 14 coastal counties and parts of Harris County east of Highway 146 sit in a designated catastrophe area where new homes typically need a TDI windstorm certificate of compliance to qualify for a TWIA policy after closing, so inspections during construction affect both the builder's schedule and the buyer's insurance.

Flood is often excluded or sublimited. Check the effective FEMA flood zone for each phase, since a subdivision can straddle a mapped special flood hazard area even when most lots sit outside it.

Builders risk on homes usually does not extend to the streets, water and sewer mains, storm drains and walls the developer builds for the subdivision. Those improvements are often secured to the city or county with a subdivision improvement bond, which is a credit instrument protecting the agency, not property insurance on the work. Damage to an unfinished street or storm drain is a separate question for the site contractor's program or a policy written for the horizontal work.

Lenders on vertical construction loans often finance houses in groups or by lot release. Each lender may want to appear as mortgagee or loss payee on the houses it funds, which means the reporting system needs a lender field by lot. Check that certificates can be issued per lot or per takedown without delay.