Construction insurance: Invest wisely and manage construction risks smartly
8 Apr 2025
5
Minutes
Katrin Straub
CEO at nextsure
Building a house involves many uncertainties, and statistically, a damage claim occurs in every second construction project. A construction performance insurance protects you from the often existentially threatening financial consequences. Find out when this insurance is indispensable and how you can ensure optimal protection for your project.
The topic in brief and concise terms
A construction insurance policy protects builders and involved companies from the financial consequences of unforeseeable damage to the building during the construction period, such as damage caused by storms, vandalism, or negligence.
The cost of insurance depends on the construction amount, type, and duration and is low in relation to the potential damage; it is often a prerequisite for obtaining construction financing.
Important exclusions typically include fire damage and construction defects; a thorough review of the contract conditions and supplementation with, for example, liability insurance for builders and fire shell insurance is essential.
Construction All Risks Insurance: The Facts – Protection Against Unforeseeable Building Risks
A construction performance insurance safeguards against unforeseen damages to the shell and new construction throughout the entire building period. It protects builders and all involved companies from the financial consequences of, for example, extreme weather events or vandalism. The insurance sum is based on the total construction costs of the building, excluding land and development costs. Many banks even require the conclusion of such a policy for granting a construction loan.
Statistically, fifty percent of all construction projects experience a claim. The construction performance insurance typically covers damages due to force majeure, negligence, theft of firmly installed parts, and construction or material defects. It is an essential safeguard to minimize the financial risk of a construction project, which often amounts to several hundred thousand euros. Protection generally begins with the establishment of the construction site and ends when ready for occupancy or upon acceptance. A builder's liability insurance ideally complements this protection.
Practical Check: When does the building performance insurance pay out and what costs arise?
The construction all-risk insurance covers a variety of unforeseen events that may occur during the construction phase. A typical example is a severe storm that damages the newly tiled roof and allows rain to penetrate, leading to further damage to the interior finishing; in this case, the insurance covers the repair costs. It also provides coverage in the event of vandalism, for instance, when unknown parties break window panes or damage already installed sanitary fittings. Another scenario involves unforeseen soil conditions, which lead to subsidence and damage to the shell construction – here too, the costs for damage assessment and rectification are covered.
The costs for construction all-risk insurance are variable and depend on several factors. Key factors include the construction sum, the type of construction project, the planned construction period, and the desired level of coverage. For a construction project with a budget of 250,000 euros, a good all-risk insurance policy can be taken out for a one-off premium of less than 300 euros. For a budget of 350,000 euros, the premium increases by about 65 to 100 euros. Many policies include an excess, which can range from 150 to 2,500 euros. It is common to apportion the costs among the participating construction companies, as they also benefit from the insurance cover. A structural fire insurance is often not included and should be considered separately.
Scope of coverage in detail: These damages are typically covered
The core benefit of a construction insurance policy is the protection against unforeseen damage or destruction during the construction period. The insurance typically covers a wide range of risks, including:
Damage caused by exceptional weather conditions such as storms, hail, or heavy rain (but not normal weather conditions like frost).
Vandalism and malicious damage by third parties.
Theft of components already firmly attached to the building (e.g. radiators, windows).
Negligence or clumsiness of construction workers leading to damage.
Unknown properties of the construction site causing damage.
Consequential damage from construction or material defects (not the defects themselves).
Glass breakage in fixed panes.
Damage caused by falling scaffolding or components.
Importantly, the insurance covers the costs to restore the condition immediately before the damage occurred. This includes material and labour costs. Clean-up costs and damage assessment costs are often included too. A sensible addition can be the home insurance, which applies after completion.
Limits of Coverage: What the Construction Performance Insurance Does Not Cover
Despite comprehensive protection, there are certain risks and damages that a construction all-risk insurance typically does not cover. It is important to be aware of these exclusions to avoid insurance gaps. Typical exclusions include:
Damage from fire, lightning strikes, or explosions; for this, a separate fire insurance for shell construction is required, which is often offered as a complimentary component of a later residential building insurance.
Damage caused by normal weather conditions, which are to be expected seasonally and locally (e.g., frost without extraordinary cold).
Construction defects, i.e., faults in the execution of the building work itself; generally, the executing company is liable for these.
Theft of loose building materials or tools; usually, only the theft of permanently installed parts is insured.
Costs due to construction delays, unless a special construction-related business interruption insurance has been concluded.
Insolvency of the construction contractor or other contractual partners.
Damage intentionally caused by the policyholder or their representatives.
Acts of war or civil disturbances.
Examine the insurance terms carefully for exclusions and coverage extensions. For comprehensive protection, additional modules or supplementary insurances such as the natural hazard insurance for the completed building are often sensible.
Expert Knowledge: Legal Aspects and the Role of the VOB
The contract and regulations for construction services (VOB), particularly Part B, play a role in risk management in construction. According to Section 7 VOB/B, the contractor generally bears the risk for their services until acceptance. However, if damages occur due to force majeure, war, unrest, or other objectively unavoidable circumstances for which the contractor is not responsible, the contractor is entitled to compensation for the services already performed. The construction insurance can provide clarity here by covering the damage irrespective of the exact liability issue, thus avoiding lengthy disputes between the client and the contractor.
Insurance terms for construction insurances often refer to the General Terms and Conditions for Building Insurance of new constructions by clients (ABN) or the General Terms and Conditions for Construction Insurance for contractor services (ABU). These regulate details like the scope of insurance, insured risks, and exclusions. It is crucial to understand the specific clauses of your own contract, as deviations may occur. For example, co-insurance of existing structures in renovation or refurbishment projects is often an important additional component. Also, the exact definition of when the insurance cover ends (e.g., when ready for occupancy or six working days after use begins) is contractually defined. Comprehensive advice on insurance related to home and housing is therefore recommended.
Optimal Coverage: Tips for Choosing the Right Construction Insurance
Choosing the right construction all-risk insurance requires careful consideration of various offers and contract details. A crucial point is determining the insurance sum correctly; it should cover all building costs, including materials, components, and own contributions. An underestimated sum can lead to underinsurance and consequently to reductions in benefits in the event of a claim. It's advisable to calculate the construction sum generously; additional contributions are often minimal, and excess premiums are refunded after the final settlement.
Pay attention to the exact scope of services and possible exclusions. Consider the following points when making your choice:
Check whether damages due to gross negligence are covered.
Clarify the extent of the deductible; a common range is between 150 and 2,500 euros per claim.
Ensure that damages due to unknown properties of the building plot are also covered.
Consider additional options like the inclusion of theft of already installed parts or cover for damages to old buildings during renovations.
Inform yourself about the terms regarding duration and possible extensions in case of construction delays.
Compare not only the price but especially the services of at least three different providers.
Make sure that search and clearance costs are insured up to a reasonable amount (e.g., 20,000 euros).
Our expert tip: Regularly document the construction progress with photos to provide evidence in the event of a claim. A comprehensive overview of necessary construction insurances helps to keep track.
Supplementary insurance for comprehensive protection in construction
Construction all-risk insurance is a central component, but for comprehensive protection, additional insurances are often necessary. One of the most important is the builder's liability insurance. It covers personal injury and property damage to third parties on your construction site, for example, if a passer-by is injured due to inadequate site security. The sum insured should be at least three, ideally five million euros.
A fire shell insurance is essential, as fire damage (fire, lightning strike, explosion) is usually not covered by construction all-risk insurance. This is often included free of charge in a subsequent residential building insurance policy, which protects the building after completion. For builders carrying out their own work or employing private helpers, helper accident insurance is important, as these helpers must be covered by the statutory accident insurance. Check whether the risk for the undeveloped land is covered by your personal liability or the builder's liability insurance taken out early, until construction begins. This way, you close possible liability gaps from the start. For landlords, special landlord insurance is also relevant.
Conclusion: Construction performance insurance – a sensible investment in the security of your construction project
More useful links
Wikipedia offers a comprehensive overview of performance bonds.
Federal Statistical Office (Destatis) provides current statistics on the construction industry in Germany.
Bauherren-Schutzbund e.V. offers a detailed report on construction defects from the year 2022.
Main Association of the German Construction Industry delivers figures and facts on the German construction industry.
Federal Institute for Research on Building, Urban Affairs and Spatial Development (BBSR) publishes analyses on housing and construction topics.
FAQ
Why is a construction performance insurance beneficial for private builders?
It protects against substantial financial burdens due to unforeseen construction damages, which can quickly exceed one's own financial resources. Since statistically, every second construction project is affected, it significantly minimizes a major risk.
What role does the VOB play in construction performance insurance?
The VOB/B, among other things, regulates the transfer of risk. Construction performance insurance can provide coverage regardless of fault, helping to avoid disputes between the client and contractor under VOB.
What is the difference between construction all risk insurance and builder's liability insurance?
The construction performance insurance covers material damage to your own building. The builder's liability insurance, on the other hand, provides coverage for personal injury and material damage caused to third parties by the construction site (e.g. an injured passerby).
How long does a construction performance insurance last?
Usually, it begins with the setup of the construction site and ends when the building is ready for occupancy or at its acceptance, often at the latest after two years. In case of delays, an extension must be requested.
Are self-contributions included in the construction insurance coverage?
Yes, the value of planned personal contributions should be included in the insurance sum. Some insurers may charge an additional fee for this, as the risk associated with amateur work might be considered higher.
What happens if construction costs increase during the build?
If construction costs increase, this must be reported to the insurer immediately to adjust the sum insured. Otherwise, there is a risk of underinsurance in the event of a claim, leading to a reduction in benefits.
