Do lenders require builder's risk insurance?
Yes, most lenders in Colorado and Utah require builder’s risk insurance before funding construction projects to protect their financial interest until the build is complete.
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Complete Guide to Lender Requirements for Builder's Risk Insurance
Why This Question Matters for Colorado and Utah Residents
Builder’s risk insurance is a specialized policy that protects new buildings—and the lender’s collateral—during construction. In Colorado and Utah’s active construction markets, understanding whether lenders require this coverage is vital for everyone from local contractors to first-time business owners starting a build.
- Loan Approval Hinge: Lenders typically require proof of builder’s risk insurance before releasing any construction funds, as it protects both the lender and borrower if disaster strikes.
- Regional Hazards: Severe weather events (hailstorms in Colorado, flooding or wildfires in both states) make builder’s risk insurance especially critical in local projects.
- Project Continuity: If a fire or theft occurs mid-project and there’s no coverage, not only is the lender exposed—your business could face crippling losses as well.
What Most People Get Wrong
Many new developers or small business owners assume that permanent property insurance is enough or can be activated early, but lenders (especially local banks and credit unions) almost always require a dedicated builder’s risk policy throughout construction. Another misconception: thinking builder’s risk is optional just because it isn’t state-mandated—it is a near-universal lender requirement for financed builds.
As commercial property premiums in Colorado average $800–$3,000 per $1M coverage, the exposure during construction is simply too great for any lender to overlook—especially in high-risk hail or wildfire corridors found throughout both states.
The Complete Picture
Yes, most lenders in Colorado and Utah require builder’s risk insurance as a condition for construction loan approval. They want clear proof that the project—and their investment—are protected from risks like fire, theft, vandalism, and major weather events until the build is complete and permanent insurance takes over. Proof of coverage (with the lender listed as a named insured or mortgagee) must be provided before any funds are drawn, and coverage must remain active until final inspection and occupancy. Neglecting this step can cause funding delays or even loan default.
Local context: Hail is Colorado’s #2 commercial insurance claim driver, and wildfires are increasingly triggering lender insistence on proper coverage in both states. Colorado law requires prompt claims handling (within 60 days), so having the right builder’s risk policy saves you from delays and out-of-pocket surprises during critical project phases. Partnering with a local, independent broker is the best way to ensure compliance and coverage tailored to your unique build scenario.
Making the Right Decision for Colorado and Utah Residents
Question 1: Has my lender specified exact builder’s risk requirements for my project?
Confirm the lender’s minimum coverage amount, allowed deductible, and any named insured requirements before you purchase a policy.
- Ask if liability and theft/vandalism coverage are explicitly required by the lender.
- Request written documentation from your lender to avoid coverage gaps or delays in loan funding.
Question 2: Are local risks (hail, wildfire, theft) addressed in my builder’s risk policy?
Builder’s risk policies must specifically include regional hazards and construction site exposures common in Colorado and Utah. For example, hail coverage is especially important from April–August in the Front Range, and wildfire risk is a must in foothill and mountain areas.
Question 3: What’s my process for transitioning from builder’s risk to permanent property insurance?
Plan ahead for seamless coverage by setting reminders to secure permanent commercial property insurance before your certificate of occupancy (CO) is granted, so there’s no lapse in protection or lender compliance.
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Real World Examples
Fort Collins Apartment Build: Lender Won’t Fund Without Builder's Risk
Background: Rachel, a local developer, began a $1.2 million apartment project on Harmony Road, Fort Collins, CO. Her lender, a regional credit union, required proof of builder’s risk insurance before releasing the first loan installment.
Coverage: Builder’s risk policy: $1.2M limit, $2,500 deductible, included hail and theft protection.
Monthly Premium: $208/month ($2,500/year)
The Incident: In July, hail damaged newly installed windows—claim totaled $27,000 (window replacement, crew delays, temporary site protection).
Total Claim Cost: $27,000 (materials: $19,000, labor: $6,000, emergency board-up: $2,000)
Rachel’s Cost: $2,500 (deductible)—the rest paid directly by insurance, project resumed without delay.
“Our lender’s insistence on builder’s risk ended up being a lifesaver. The policy not only saved our project financially but also kept us in good standing for the next phase of funding.”
Salt Lake City Small Business: Builder's Risk Unlocks Construction Funds
Background: Jason, opening a new café in Sugar House, Salt Lake City, UT, applied for a construction loan of $350,000. His bank would not release funds for the build-out until Jason presented builder’s risk coverage with the lender named on the policy.
Coverage: Builder’s risk: $350,000 limit, coverage for hail/wind, theft, vandalism; $1,000 deductible.
Monthly Premium: $48/month ($575/year)
The Incident: A spring hailstorm shattered skylights and damaged custom counters just three weeks into construction.
Total Claim Cost: $9,800 (skylight repair: $4,200, custom countertop replacement: $5,000, clean-up: $600)
Jason’s Cost: $1,000 (deductible)—all other costs paid by insurance, construction stayed on track.
“I was frustrated by the lender requirements at first, but when the storm hit, I was so glad I had proof of coverage. No delays, no arguments—just help when I needed it.”
Denver Mixed-Use Project: Missed Policy Creates Expensive Headache
Background: Liz and Troy were renovating a historic building in Denver's RiNo district into ground-floor shops and lofts upstairs. Relying on only an existing property policy instead of builder’s risk, they misunderstood their lender’s requirements.
Coverage: Only basic property insurance—no builder’s risk, no theft or construction-specific coverage.
Monthly Premium: N/A for builder's risk (policy not in place)
The Incident: During construction, $65,000 in installed plumbing equipment was stolen on a weekend.
Total Claim Cost: $65,000 (equipment and reinstallation)
Liz and Troy’s Cost: $65,000—lender withheld further funding, and the partners paid out-of-pocket due to ineligible claim.
“We assumed our regular insurance covered everything. Our bank corrected us—too late. Now we know builder’s risk isn’t just paperwork. It’s real protection.”
Avoid These Common Mistakes
Mistake #1: Assuming Permanent Property Insurance Covers Construction
What People Do: Use a regular property or homeowner’s policy in place of builder’s risk when starting new construction or major renovations.
Why It Seems Logical: It feels simpler and less expensive to rely on an existing policy, especially when the build site is already insured for other purposes.
The Real Cost: Lenders will not accept non-specific coverage—funding is delayed or denied, and uncovered claims (often $25,000 or more) can devastate your budget. In CO/UT, uncovered hail or theft losses can halt projects and breach loan agreements.
Smart Alternative: Work with a local independent agent to secure proper builder’s risk tailored for your project—the lender will insist, and you’ll have genuine protection through completion.
Mistake #2: Underinsuring the Project’s Full Value
What People Do: Set builder’s risk policy limits too low, or overlook coverage for all project phases and materials.
Why It Seems Logical: Lower limits mean smaller premiums, and business owners hope to ‘get by’ with the bare minimum.
The Real Cost: If hail, fire, or theft occurs—especially in Colorado’s risk-prone areas—coverage may be insufficient, and the owner is responsible for all excess damages. In local projects, even a $200,000 underinsurance gap could jeopardize loan compliance and business solvency.
Smart Alternative: Always base limits on the licensed contractor’s cost estimate and update coverage as needed through the build. A qualified FoCoIns advisor can help you match limits to lender and real-world requirements.
Mistake #3: Failing to Transition Timely to Permanent Property Insurance
What People Do: Neglect to replace the builder’s risk policy with permanent commercial property insurance as soon as the project is complete.
Why It Seems Logical: Project completion feels like job done, or owners assume coverage will overlap automatically.
The Real Cost: Any lapse or gap could violate lender terms or leave your finished property exposed. A short lapse between builder’s risk expiration and permanent policy activation could mean uncovered claims—costing tens or hundreds of thousands in property damage.
Smart Alternative: Proactively coordinate with your agent and lender. Set calendar reminders and ensure seamless coverage transfer, so your lender and your business are fully protected—without a single coverage gap.
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