First and foremost, the contractor must be properly licensed and insured. Request a certificate of insurance listing yourself as an additional insured and make sure there is a written contract in place that clearly states what insurance requirements are required by all parties. A properly insured GC will have an underlying policy with limits of $1 million per occurrence and $2 million aggregate.
An excess/umbrella limit of $5 million will be a typical additional limit. The general contractor should also have a process to thoroughly screen all subcontractors for appropriate insurance coverage.
We discourage homeowners from acting as their own general contractor, as the risk far outweighs any perceived cost savings. A thorough knowledge of your state’s liability and workers compensation insurance requirements is a starting point, and frequently the end point, of this sometimes-risky strategy.
Once a suitable contractor has been screened, an insurance program can be structured to protect the property owner. A BUILDERS RISK POLICY (a.k.a. “course of construction”) should be put in place. This policy will cover damages to the structure while under construction – including damage \from fire, wind, theft, lighting, explosion and vandalism. The coverage amount should be the completed value of the project. Be aware that damage resulting from faulty design, planning, workmanship and materials will be excluded, which further reinforces the need to work with a highly qualified contractor that has a solid insurance plan in place.
Insurers typically view homes that are under construction or renovation as a riskier exposure due to the higher rate of losses experienced. Premiums are influenced by the availability of this specialty coverage, the overall cost of the project (not including land) and the project’s length. Limits that account for changes to the construction plan and budget can be increased after the policy has taken effect. It is important to secure coverage for the project prior to its start, as insurance carriers will decline to insure if the project is already ongoing.
Builders risk policies rarely include liability protection, therefore a separate liability policy that protects the property owner against third-party claims will round-out a solid insurance program. This may be accomplished through extending coverage from another policy or purchasing a separate policy.
For existing residences undergoing renovation or additions, homeowners should check with their agent or broker for coverage under the existing policy. Some carriers will add a construction surcharge to the policy and may require that certain loss controls and preventative measures be put in place.
There are provisions in every homeowner policy’s replacement cost language that require notification of renovations that will increase the value of the home by more than ten percent. Failure to notify your carrier could mean less coverage at the time of a claim. Additionally, some carriers have language built into their policies, which introduce special deductibles if the home is being renovated. The deductibles can be as much as five percent of the dwelling value ($50,000 on a $1 million home).
The best advice is to contact your broker or agent in advance of any project, then stay in touch with them often regarding progress and any changes to the original construction plan. This, along with the safeguards outlined above, will afford the homeowner the best possible protection throughout the construction project.
Alison Schmidt is an insurance advisor at Cook Maran who has over 10 years of insurance experience and leads the Southampton Personal Insurance New Business Unit. Ms. Schmidt and the team that supports her specialize in designing and managing insurance programs tailored to protect the personal assets of senior executives, professionals, business owners and high net worth families.