By David Porter AIA – Consulting architect to the Garlinghouse House Plans Company since 1989
You are having your dream house built on a piece of property you own. You are either hiring a builder or building it on your own by hiring the subcontractors and buying all of the materials. Do you need to be concerned with any types of insurance to protect your investment?
The answer is, absolutely. I will tell you what I know about the various types of insurance for construction projects but I will clarify that I am not an insurance expert nor am I an insurance agent. I am an architect with 40 years spent in the construction business and I know the basics of insurance coverage associated with getting buildings built. That doesn’t mean you won’t find differing opinions about this topic from what I have to say.
Let’s set up a construction project scenario and then pick away at it for what kind of insurance there should be and what the pitfalls might be if those types of insurance are not obtained or verified. We’ll say that you are building a house on a vacant lot that you own. If you are using a builder, then you will want to verify that the builder is protecting your investment by carrying the same insurance types and policy limits as you would want to carry if you were not using a builder but were doing all of the hiring and purchases on your own (owner-builder method). You will also want to verify that the builder is then requiring his subcontractors to carry the same insurance coverage that you want the builder to carry.
We’ll start with the land and what insurance protection it should have. Since you own the land, you incur the liability of anything happening on that land. When the house is finished, you will have a homeowner’s insurance policy that will protect anything sitting on that land and the liability incurred. So, if someone slips on your icy sidewalk, your homeowner’s coverage will protect and defend you from paying the medical and legal bills of the person who fell and was injured and who sued you for alleged negligence. You will need similar coverage to protect your vacant property and the house that will start to rise from the earth.
Below, I will list out the various types of insurance coverage associated with construction projects and what each protects against and what risks are incurred if such insurance is not purchased. All of these insurance types are purchased on a short term basis for the duration of the construction work. At the completion of construction and prior to you moving in, you will cancel out all of the short-term construction insurance policies and obtain a standard homeowner’s insurance policy.
BUILDER’S RISK Insurance:
- Protects, you the property owner, from thefts of materials and damages and repairs to the property and house under construction. Think of it as homeowner’s insurance protection for the property before it has an occupied home on it. It is a short-term policy that is purchased for a specific, short-term task of constructing a building on a piece of land.
- Even if you use a builder, you will still need a Builder’s Risk policy because none of the builder’s insurance policies will cover theft or property damage from your project (if your Builder’s Risk insurer has to pay out based on materials theft or property damage that they think could have been prevented by your builder, they will sue the builder’s liability insurance carrier to seek reimbursement of their payout to you).
- Some Builder’s Risk policies exclude materials theft until the building is “dried-in” or can have the doors locked to protect their investment (and yours). Read the fine print of the Builders Risk policy you are considering to make sure you have coverage for any and all materials theft at the property.
- Why might you need Builder’s Risk coverage? Here are some scenarios:
- What if half of the newly delivered lumber is stolen one night? Is it your builder’s fault? Is it the fault of the carpenter you personally hired to do the framing on your house? Is it your fault if you are ordering and buying all of the lumber? You can blame them or you but they or you don’t have insurance that will get you back the missing lumber, unless a Builder’s Risk policy is in place. As I noted in #2 above, your Builder’s Risk insurer doesn’t like having to pay claims so they will try and seek reimbursement of their payout from someone who should have secured the lumber so that it wouldn’t have been stolen.
- Say the house is almost finished and there is a fire that badly damages a large portion of the house or it is impacted by a hurricane or a tornado. You don’t yet have a homeowner’s policy on the house that would normally cover such damages because you have not yet moved in. It is the Builder’s Risk policy that provides damage protection until you have moved in. If the reason for the fire can be traced back to a subcontractor’s error (i.e. faulty electrical wiring, etc.), then the Builder’s Risk insurer will sue the negligent party (the general liability policy of the subcontractor) to get back the money they are required to pay out to you for the damage claim. If the reason for the damage claim is due to a catastrophic storm, that is not anyone’s fault and the Builder’s Risk policy should pay for the claim unless the policy’s fine print excludes “Acts of God.”
GENERAL LIABILITY insurance:
- This is insurance your builder or the subcontractors that you personally hire should carry. In many states, builders or subcontractors are not allowed to renew and retain their state-issued licenses without showing proof that they carry current, General Liability insurance coverage. As will be discussed a little later under “Certificates of Insurance,” you will want to check that their policy is current and will remain current for the duration of your project.
- Many states stipulate the minimum coverage limits on such policies. This is a policy that a holder purchases annually to cover their business operations. It is not a separate policy that they need to purchase just to build your house.
- General Liability protects the builder or subcontractor from mistakes and errors that might get them sued or have a claim against them for damages. It also provides them with contractual liability protection in case you file a claim against them for breach of contract. For instance, say a plumber has a new guy on the job and he ends up cutting through all of the studs in a critical bearing wall and part of the upper framing partially collapses. No one was injured but there are now major repairs to be made, an engineer has to be hired to put a repair plan together and your tight deadline to get the job done and moved into is now shot. You may have to pay a few extra months rent where you are currently living and you hadn’t planned on that expense. If you hired the plumber, the fixing up of everything will be your problem. You will want the plumber to pay for all of your costs to fix the problem. He will turn your bill over to his General Liability insurance company to resolve and pay. If he didn’t have General Liability coverage, he would probably walk from your job and let you come sue him to try and collect for your damages. Or, he may file for bankruptcy because he doesn’t have the money to pay you back for the trouble he caused and you are then stuck with the extra charges from his mistake.
- I would recommend requiring a $2 million “general aggregate” limit with a $1 million single occurrence limit. This might sound like a lot for building a simple house but these policy limits have become the norm in the construction insurance business so you would not be asking for too much by requesting these limits.
WORKERS COMPENSATION insurance (known as Workers Comp coverage):
- This is insurance that provides coverage for workers on the job who may be injured or killed in the process of building your house. Each state has some form of Workers Comp laws and statutory policy limits that all employers are required to carry (with some exceptions to be noted below).
- Construction is a dangerous business and can cause injuries and sometimes death. Having workers on your house construction project who are not protected by some type of Workers Comp coverage is very risky.
- Some states do allow small-sized contractors to be exempt from having their workers protected by Workers Comp insurance. For your own protection, either don’t hire a builder or subcontractors who cannot prove that all of their workers are covered by Workers Comp or have them sign a contract with you that states that they agree to take any and all responsibilities for any injuries, disabilities, or death to any of their workers and to hold you harmless from such (get this language checked with an attorney). You don’t want to get caught in the legal tussle of an attorney trying to collect for rehabilitation or disability expenses for his injured construction worker client when he has not been protected by the Workers Comp insurance system.
- How does this affect you? If you hire a builder, make your contract state that the builder takes on any and all responsibility for every worker that steps foot onto your property to make sure that he/she is covered by Workers Comp coverage or that he takes on complete responsibility for any injuries or death they may incur on your project. Otherwise, if your builder uses a particular carpentry sub who may be slightly cheaper and it’s because he doesn’t have Worker’s Comp coverage on any of his framers and one of them falls off of the roof and breaks his neck and is paralyzed for life, the injured party will then turn to your property insurance (your Builder’s Risk policy) or to you personally, because the injury happened on your property and so you are liable. It gets very messy and very expensive. So, either make it your policy to only hire subs that protect their workers with Workers Comp protection or seek out legal advice on how you can make it emphatically clear that the sub or builder is the only party responsible for job safety and injury claims on your project.
- I can hear you now questioning why you would need to have your builder or subs you personally hire have automobile insurance coverage. But, you do need to have them prove that for each vehicle that will come onto your property (their trucks, delivery trucks from vendors, etc.) they all have automobile insurance coverage; at least liability for bodily injury and property damage.
- The reason is that if one of the vehicles, say, runs into the front porch of your new house and knocks down some columns and the roof then collapses, who will you turn to for paying for the repairs and any delay claim that causes you to have to spend more money than anticipated? Your Builder’s Risk policy might exclude damages caused by vehicles because they will want the automobile insurance of the vehicle’s owner that caused the damages to pick up the tab for the repairs. The Builder’s Risk carrier only wants to have to pay out when the cause of the claim is clearly within their policy allowances. Without you verifying that all vehicles coming onto your property are covered by valid insurance, you could end up paying for the porch and roof damage out of pocket and not from an insurance claim check.
CERTICATE OF INSURANCE (COI):
- A one-page document issued by an insurance agent showing proof of insurance. There is no cost to the insured to request a COI for a customer or third party. It should be made out specifically to you, the owner, and for the address of your project. Do not accept a photocopy of a photocopy of a photocopy from your builder or a sub that you have no proof was not creatively edited by the builder or sub to show an untrue policy limit or expiration date. Insurance agents are used to issuing COI’s and they get them out quickly and directly to the COI holder.
- If you hire a builder or individual subs, you will want a COI for each company showing that they are protected by the insurance types and policy limits that you request (general liability, workers comp, and automobile). You will want to make sure that there is a clause on the COI that states “not allowed to expire or be cancelled without 30-days notice to holder.” That will protect you, the holder of the COI, from having the insured (builder or subs) cancel their insurance because they cannot afford to pay the premiums any longer. I have known some construction companies, who would purchase a General Liability policy, submit that policy number on their contractor’s license renewal form, get their new license in the mail, then cancel their general liability policy and get back their premium payment. The 30-day, no-cancel notification protects you of an unknown policy cancellation.
You now probably know more than you may have wanted to, about construction insurance to protect your investment. But hopefully, you will now be a better-informed future home builder.
‘til next month, hoping all of your building experiences are happy ones.
Any questions, please contact Dave at [email protected].