Residential Construction or Remodeling and Insurance
If you are about to engage a contractor for new construction or remodeling of an existing structure you need to consider insurance for the work being performed. The problem is that there is not a single insurance policy to cover the various issues that may arise during construction or remodeling.
First, let’s start with homeowners’ insurance. In some instances, your homeowners’ insurance may provide coverage for issues that may arise during construction or remodeling. This is best addressed on a policy by policy basis and should be addressed by your insurance agent. Be aware that work performed by homeowners regarding additions or remodeling if done incorrectly may actually void your home-owners insurance policy.
Second, the homeowner should consider builders risk insurance for new construction or remodeling projects, such as room additions. This insurance covers the worksite, in addition to the building and materials during construction. For example, while building a new home, if lumber and other materials that were stacked on-site are stolen, then those items would be covered. Also, if the structure catches fire or is damaged by weather you would be covered.
The party responsible for paying for the builder’s risk insurance should be clearly stated in the construction contract. Understand that if the contractor agrees to pay for this insurance, he will likely obtain a policy for the total cost of the project which will be passed along to the homeowner. If the homeowner purchases the insurance, he or she can obtain a policy that can be scaled up as the work progresses. For example, at the start of the project when a hole has been dug for the basement and ready for the foundation, the risk for loss is small. As the project progresses, and the foundation and wood framing are built, the risk increases. The owner is at an even higher risk when the electrical, plumbing and other trades have completed or nearly completed their work. If you have a fire or weather-related loss at this stage, it can be significant with damages approaching the total cost of the project. By obtaining an insurance policy that can be scaled up as the project progresses, you can reduce the cost of the overall insurance premium. On the flip side, the contractor may have his own builders’ risk insurance to cover his equipment and tools on the construction site, so understanding who has what insurance and what is covered is critical.
Third, the homeowner will want to confirm that the contractor has general liability insurance. This will cover losses due to injury to individuals who are not employees and for property damage. For example, if a neighbor comes over to view the work and gets hurt after tripping over materials, his injuries are the responsibility of the contractor and should be covered by their general liability insurance. Another example would be if the contractor damages the neighbor’s landscape, which would be covered by general liability insurance. Watch out for an indemnification clause in the contract that puts the risk of injury or damage caused by the contractor or others back on the homeowner.
The contractor should have insurance on his commercial vehicles. This would cover damages caused by the operation of these vehicles on the worksite, coming and going from the worksite, in addition to travel related to the project. This protects the contractor and the homeowner in event that one of the contractor’s trucks stops on the way home to pick up supplies for the project, and they are stolen prior to arriving at the job site the next day.
Fourth, it should be stated in the contract that all sub-contractors will have their own general liability and workers’ compensation insurance. The contract should also contain an indemnification clause that states the contractor will pay for any damages he or his sub-contractors causes as a result of their negligence. Recognize this clause is of little use if the contractor files bankruptcy, or has little assets that can be applied to a judgment. This is why you should not base your hiring decision on saving money by going with a one-man band with a run-down pick-up truck to do the work.
Fifth, the homeowner may also want to consider having the contractor obtain completed operations coverage. This insurance provides coverage for things that can go wrong after a job is complete and the contractor has left the site. The classic example is where the work is performed in the summer and the plumbing is installed in an outside wall without insulation. The problem will not show up until winter when the pipes freeze and break causing damage to the finished home or remodel work.
Some of these insurance policies may overlap and coverage may be provided on more than one policy depending on the nature of the problem and the damage. For example, if a homeowner has a new roof installed and during installation, it is damaged by hail, water could enter the home causing damage to the interior. A homeowner’s policy will likely cover the damage to the interior of the home, but not the cost for a new roof. If a builder’s risk insurance policy is in place, it would cover the cost for the new roof.
Finally, it is never a good idea to just rely on a contract which states the contractor will provide any of these insurance policies with specific limits of coverage. Don’t rely on a contractor saying they have all the necessary insurance for their industry. You must demand that a certificate of insurance is provided and that the homeowner be named as an additional insured. In addition, the general contractor should be named as an additional insured on certificates for any sub-contractors he hires. These certificates of insurance should also be provided to the homeowner.
Any certificate of insurance should have the following information:
- The home owner’s name and address along with the address of the project;
- The Contractor’s name and address;
- The name of additional insured individuals or companies such as the owner and sub-contractors. Others may also demand to be listed such as the lender, architect, engineer etc.;
- Limits of coverage for the insurance;
- The date(s) the policy is in effect. Make sure that it spans the time necessary to complete the project;
6. It is important that the certificate states that the insured notify all named insureds of any cancellation of the policy. This prevents the contractor from obtaining the policy and then not paying the premiums causing the policy to lapse. This allows the named insured to obtain insurance thus preventing the project moving forward without sufficient insurance coverage.
Conclusion
Insurance-related to construction contracts can be complicated and require the homeowner to do his homework. Construction contracts, in general, are complicated and ripe for controversies and litigation. If the homeowner is not well versed in construction and its related issues, then it may be wise to hire an architect or engineer to oversee the drafting of the contract and provide supervision of the work until the completion of the project. Hiring a professional will add to the overall cost of the project, however, the loss due to a lack of insurance or defects in the work can be much more costly and likely will lead to litigation that increases the loss even more. Money spent early on to insure the proper insurance, contracts, and plans and specifications are in place along with oversite of the work for compliance with these documents greatly increases the likely hood that the project will be completed in a timely manner, on budget, and without significant problems.
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