The $34,000 Change Order: A Builder's Risk Coinsurance Story

The story below is a hypothetical example, built to show how a common builder's risk clause works.

Mike is a custom home builder in the Brazos Valley. Last spring he signed a $750,000 contract for a four-bedroom home and bought a builder's risk policy with a $750,000 limit. He thought that covered it.

Over the next five months the owners kept adding things. They upgraded the cabinets and countertops, added a covered outdoor kitchen, and finished out a bonus room over the garage. Each change order made sense on its own. Together, they added $150,000 to the job.

In October, with the house dried in and the drywall half hung, an electrical fire tore through the back of the structure. The damage came to $204,000. Mike filed his claim, expecting a check for the full loss less his $2,500 deductible.

The check came back $34,000 short. Nothing was excluded and the adjuster didn't deny anything. Mike had run into the policy's coinsurance clause.

What coinsurance means on builder's risk

Many builder's risk policies are written on a completed value basis. You insure the project for what it will be worth when it's finished, from day one, even though the building is only a slab on the day the policy starts. That's what keeps premiums manageable: the carrier prices the policy knowing the value will grow into the limit.

The trade-off is a coinsurance clause, sometimes called a "need for adequate insurance" provision. If your limit is lower than the project's true completed value, the carrier pays only the share of any loss that your limit bears to that value. You effectively become a co-insurer for the gap.

This catches builders off guard because it doesn't matter how far along the project is when the loss happens. The comparison is always to the value at completion, including every change order added along the way.

The math behind Mike's short check

The standard formula looks like this:

Payment = (Limit carried / Completed value) × Loss - Deductible

Here's how Mike's numbers worked out:

Item	Amount
Original contract (policy limit)	$750,000
Change orders added during the build	$150,000
True completed value	$900,000
Share the carrier will pay ($750,000 ÷ $900,000)	83.3%
Fire loss	$204,000
Carrier's share of the loss (83.3% × $204,000)	$170,000
Less deductible	$2,500
Check Mike received	$167,500
Check if he'd been fully insured ($204,000 − $2,500)	$201,500
Out of Mike's pocket	$34,000

Mike was underinsured by about 17%, so the carrier cut his claim by about 17%. Raising his limit to $900,000 when the change orders came in would have cost additional premium, but likely far less than the $34,000 he absorbed.

How builders end up underinsured

Mike's mistake is one of the most common, but it isn't the only one. Watch for these:

• Change orders that never reach the policy. Upgrades, additions and owner selections raise the completed value. The policy limit doesn't move unless someone tells the agent.
• Insuring materials but not labor. Completed value usually means the full cost to build: materials, labor, overhead and profit. Insuring only your material costs can leave a large gap.
• Using the current value instead of the finished value. Some builders set the limit at what's in place when the job starts. On a completed value form, that's almost guaranteed to trigger a penalty.
• Rising material prices. If lumber, concrete or other costs climb during the build, the cost to finish goes up with them.
• Leaving out site work or extras. Driveways, pools, fencing and outbuildings may need to be included, depending on the policy. Land value is normally excluded, so it shouldn't be counted.

How to avoid a coinsurance penalty

1. Insure the full completed value from the start. Use your full contract price, including labor, overhead and profit, not just your material costs.
2. Report every significant change order to your agent. Make it part of your process: when a change order is signed, send a copy to your agent so the limit can be raised.
3. Build in a cushion. A limit set slightly above the expected completed value gives you room for price increases and small changes.
4. Ask about a reporting form. Some carriers offer policies where you report values monthly and pay premium on what's actually in place. These have their own rules, and late or low reports can also reduce a claim.
5. Ask whether coinsurance can be waived. Some builder's risk policies drop or relax the coinsurance clause. Find out what your policy does before a loss.
6. Review your policy before the build starts. Check the limit, the deductible and what counts toward completed value, such as soft costs, site work and materials stored off site or in transit.

Let Sherlock Insurance, LLC investigate your coverage

A coinsurance penalty doesn't show up until you file a claim, when it's too late to fix.

Starting a new build, or already in the middle of one? Call us for a quick coverage check before the next change order is signed.

Sherlock Insurance, LLC · Texas License No. 2672234 · Oklahoma License No. 10012010 · NPN 15751042

This article is for general information only. Builder's risk policies vary by carrier, and the terms of your own policy determine how a claim is paid. Talk with a licensed agent about your specific coverage.

Questions about your coverage? Call our team at (405) 301-8150 or contact us at sherlockgroup.com/contact.