How Much Builders Risk Coverage Does a Major Remodel Actually Need?

Case study details have been modified to preserve confidentiality while retaining the underlying insurance and risk management lessons.

A major renovation creates a deceptively simple insurance question:

How much should the project actually be insured for?

The wrong answer can leave an owner substantially underinsured. The other wrong answer can result in paying to insure values that aren’t actually at risk.

A recent California project reviewed by Kavana illustrates why determining the correct builders risk limit requires more than simply looking at the contractor’s construction budget.

The Project

The project involved a substantial renovation of an existing single-family residence in Northern California.

The scope included significant structural work along with new construction, creating several important insurance questions:

• What is the proper value of the existing structure?
• How should structural work be described to the carrier?
• Does the work constitute underpinning?
• How much Ordinance & Law coverage is appropriate?
• Should soft costs be included in the builders risk limit?

These questions matter because builders risk policies can treat existing structures, renovation costs, foundations, structural modifications, and soft costs very differently.

Construction Cost Is Not the Same as Replacement Cost

One of the most common mistakes we see is assuming the contractor’s renovation budget represents the entire value that should be insured.

It doesn’t.

Imagine an existing home with a $900,000 replacement cost undergoing a $700,000 renovation.

There may ultimately be approximately $1.6 million of property value exposed during construction, depending on how the policy is structured.

A policy covering only the $700,000 renovation could leave the existing building dangerously exposed.

Conversely, some builders risk policies separately define or exclude existing structures, making it critical to understand exactly what the quoted limit represents.

Structural Work Needs to Be Described Precisely

Another issue is terminology.

Underwriters pay particular attention to work involving:

• foundations;
• load-bearing walls;
• excavation;
• structural additions;
• temporary shoring;
• underpinning; and
• connections between existing and new construction.

A structural connection or “tie-in” isn’t automatically underpinning.

Underpinning generally involves strengthening, extending, or stabilizing an existing foundation.

That distinction matters because true underpinning can change both carrier appetite and pricing.

Don’t use an aggressive structural term simply because it sounds technically appropriate. Describe what the contractor is actually doing.

Don’t Ignore Ordinance & Law

Major renovations can trigger current building-code requirements that didn’t apply when the original home was constructed.

That can create costs associated with:

• demolition of undamaged portions;
• increased cost of construction;
• code-required electrical upgrades;
• seismic requirements;
• energy-efficiency standards; and
• other mandatory building improvements.

For a substantial California renovation, a token Ordinance & Law limit may not be enough.

The appropriate amount should be evaluated against the age of the structure, jurisdiction, extent of renovation and potential code exposure rather than selected arbitrarily.

What About $100,000 of Soft Costs?

The project also contemplated approximately $100,000 in soft costs.

Soft costs can include expenses such as:

• architectural and engineering fees;
• permits;
• construction loan interest;
• real estate taxes;
• insurance;
• legal/accounting expenses; and
• additional professional fees caused by a covered construction delay.

But simply telling an underwriter “there are $100,000 in soft costs” isn’t ideal.

A defensible breakdown gives the carrier a much clearer picture of the exposure and helps determine which costs are actually insurable under the policy.

Kavana’s Recommendation

For substantial renovations, don’t start with the question:

“What’s the construction budget?”

Start with:

“What property and costs would we need to replace if a catastrophic loss occurred halfway through construction?”

Then separately identify:

1. Existing structure replacement cost
2. New construction and renovation value
3. Structural work
4. Materials and property in transit or temporary storage
5. Soft costs
6. Ordinance & Law exposure
7. Any property specifically excluded by the policy

That produces a much more defensible builders risk program.

The KCRI Takeaway

Builders risk isn’t simply a construction contract with an insurance rate attached to it.

A $700,000 remodel can create an exposure substantially greater than $700,000.

The most important work often happens before the application ever reaches an underwriter: correctly defining the existing structure, renovation value, structural scope and additional exposures.

That’s where good builders risk placement begins.