Builder's Risk: Insuring the Asset While It Is Still a Construction Site
Faraday's read: builder's risk is the most underestimated line in the entire development. It covers the period when the asset is most fragile and least productive, a half-built shell full of expensive, uninstalled equipment and no revenue. The developer's instinct is to treat it as a construction cost. The lender's instinct is correct: it is the coverage standing between a single fire and a defaulted loan. Get the sum insured wrong, or let the policy lapse a week before substantial completion, and the gap that opens is exactly the gap the whole financing was built to close.
Knowledge check
Why do lenders scrutinize the sum insured and the policy period of a builder's-risk policy so closely, rather than treating it as the contractor's concern?
Show the answer
Because an under-insured sum leaves a shortfall the borrower must cover from equity or new debt after a loss, and a policy that expires before operational coverage begins creates a coverage gap. Either failure exposes the lender's collateral precisely when the asset is most vulnerable, so the lender treats the sum insured and the period as conditions of the loan, not construction details.