Construction Insurance for Homeowners

Construction Insurance: What the Homeowner Needs to Know

Construction insurance is no different than normal insurance for the homeowner. The intent is to ensure that any liability for damage, personal injury or other types of damages do not become a financial or legal issue for you, the homeowner.

What are some of the important issues that should be understood by the homeowner, prior and during a construction activity?

Note that in general, the insurance concerns and issues are basically the same for a renovation, addition or a new structure.

1.) It is imperative that the construction contract clearly indicate the need for the contractor to supply insurance for the project. This insurance must include any damages that may occur as a result of the construction activity.

2.) The general insurance must cover workman’s comprehensive insurance or worker’s comp as required by the State, in which the project is located. Liability insurance for property damages as well as personnel injury. Automobile insurance and equipment insurance to ensure that any vehicle issues that may occur due to the construction are covered. General umbrella coverage, which is a basic overall policy that will cover whatever, occurs on the project, due to the construction activities.

3.) If there are special activities included within the construction project, such as blasting, underpinning, roadway construction, roadway utility tie-ins, etc. specialty insurance will be required to determine the extent of necessary insurance coverage required, due to that specific activity.

4.) Builders risk insurance. This portion of the insurance coverage is the one specific type of insurance that is commonly overlooked, or improperly addressed. Builders risk insurance is the specific insurance that will cover the actual structure of the building or the site, which is at risk, due to the actual construction being performed. For example, if the project is a wood framed residential home, and the contractor or subcontractors on the project cause a fire that destroys the framing of the home, the builders risk policy will cover this loss. If the contractor misdirects a stream of water, or causes a flood in the new structure, all damages due to this occurrence would be covered under the builders risk insurance.

5.) The responsibility for the cost and the coverage under builders risk must be clearly and accurately stated within the construction contract. It is very common for the owner to be responsible for the specific builders risk insurance. One of the reasons that the homeowner will take the builders risk responsibility, is that the insurance coverage can be tiered up as the construction advances. If the sitework is being performed, and the foundation is being placed, the builders risk is minimal. Once the structure is further into construction, the liabilities for builder error or problems increases, as does the possibility of losses. The owner, through the insurance company that will eventually insure the entire completed project, will tier the builders risk coverage to customize the insurance requirements in accordance with the loss factor. Substantial money can be saved by the owner, if they decide to manage the builders risk insurance directly.

6.) Although not specifically addressed as insurance, the inclusion of a payment and performance bond is a form of specialty insurance. A payment and performance bond is an insurance policy that is taken out by the contractor responsible for the project, to insure the owner that the project will be properly built, and all debts obligated by the contract, are properly paid. A payment and performance bond, if required by the owner, will cost approximately 2% of the contract value. If the contract is for $100,000.00, then the added requirement by the owner for a performance and payment bond will be approximately $2,000.00.

7.) The requirement to add a performance and payment bond to the contract requirements should be carefully considered. Dependent upon the type of project, the economic climate of the area, the general reputation of the contractor, as well as the financial strength of the owner are all factors that will determine the need for additional cost for a performance and payment bond. This decision is the responsibility of the homeowner.

Are there specific items that the homeowner should be aware of, regarding the actual acceptance of a contractor in reference to insurance?
1.) The homeowner MUST require that the contractor supply the homeowner with a certificate of insurance. This certificate must include the following;

a.) Specific name of the project including the address.
b.) Contractors name and contact information
c.) Owners name and contact information
d.) Architect’s name and contact information.
e.) Date of the policy, inclusive of the duration period.
f.) Individual limits of insurance coverage for personnel liability, workmen’s compensation, automobile liability, umbrella coverage and general liability. This is only a suggested list; there could be additional coverages that are required.
g.) Any builders risk coverage that the owner has required the contractor to include.
h.) Additional insured; this requirement by the owner will identify all the organizations that the owner feels should be included under the contractors insurance, such as the architect, the engineers, the lending institution, etc.
i.) Specific and clear requirements for owner notification of any termination issue on the policy. If the contractor, for example does not pay the insurance premium, and the insurance is pending cancellation, there must be an assurance on the certificate of insurance that all additionally insured parties be promptly notified, prior to cancelation. THIS IS IMPORTANT!

2.) The homeowner MUST require that the contractor generate insurance certificates for all subcontractors on the project. The best method of ensuring that this requirement is fulfilled is for the owner to identify all subcontractors that are working on the project via field visits. The easiest method is to photograph the company information on the sides of the vehicles on the project. If the vehicles are not identified, simply ask for business cards from the workers. It is important that you, the owner are not intimidated by any of the workers on the project, regarding identification. It is your project, and you are legally positioned to insist on proper identification. The owner must then, via formal email or correspondence, request an insurance certificate from each individual subcontractor working on their project. Although the overall insurance coverage as provided by the general contractor should cover all subcontractors, it is recommended that the owner require individual insurance certificates, from each subcontractor, to fortify and ensure total coverage on the project.

How can the homeowner enforce the insurance requirements on their construction project?

1.) As we have indicated throughout this website, the owner has all of the financial power on the project. The owner is the entity that pays everyone else. Therefore this is the ultimate tool to control and maintain the requirements of the construction contract, including the insurance.

2.) Do not allow commencement of ANY work on the project, until the contractor has provided the proper certificate of insurance to you, the owner.

3.) Upon receipt of the certificate of insurance, call and verify the accuracy of the certificate with the insurance company, formally providing the certificate.

4.) It is imperative that there is NO work allowed on site, until you, the homeowner approves the insurance coverage on the project and is satisfied with the insurance limits.

5.) Ensure that the certificate of insurance has a notification clause regarding cancellation. This is extremely important, to guarantee that the project remain properly insured as the work commences and progresses.

6.) Any insurance issues, cancellation, threats of cancellation, etc., that may occur on the project, MUST result in a firm and confident withholding of payments to the contractor, until all issues are resolved. Do not deviate from this requirement or this focus.

What are the specific issues that the homeowner must be aware of, regarding insurance on a construction project?

1.) Contractors will commonly produce an insurance certificate that is not specifically addressed to the specific project. Insist that the certificate of insurance be customized to your project only.

2.) The additional insured requirement is commonly skipped, due to the additional costs associated with this requirement. Insist that the additional insured by accommodated.

3.) Contractors may in some instances, cleverly try to modify their submitted insurance certificate in an attempt to artificially comply with all contract requirements. This is the reason that the homeowner must confirm the validity of the insurance certificate directly with the insurance company.

4.) Contractors will commonly allow the insurance to terminate without notification to the homeowner. This is the reason for requiring the mandated notification clause on the insurance certificate.

5.) Contractors will try to save money when hiring subcontractors, by reducing the insurance requirements for these subcontractors. Do not allow this to occur, remain proactive and require the certificates of insurance from each subcontractor. Remain diligent by directly contacting the subcontractors to ensure proper insurance coverage.
Although this webpage is directed to homeowner insurance issues on a construction project and is based upon insurance requirements, there is one other possible requirement, commonly experienced on specific projects, that falls in the general responsibility scope of insurances.

On some projects, the local town or State will require that the contractor take out a special bond for specific scopes of work. For example, if the project fronts on a State highway, or the ability to obtain an approved building permit is based upon a local City or State requirement, these situations, may require the issuance of a bond for that work. If landscaping requirements are required, to secure a building permit, including special trees, plantings, or groundcover, a bond could be required to ensure that this work is properly performed. If the town requires that the sidewalks in the front of a structure are replaced, improved or installed for the first time, this work may require a bond.

The owner must be aware of these requirements, and must track the completion of this work in a similar manner as tracking all of the normal insurance requirements on the project.

How do we, as homeowners, become aware of any bond requirements?
In most situations, the zoning department of the specific town or city involved with the construction project will issue a letter of approval. This letter will include all of the requirements regarding this approval. Within this letter will be listed any bond requirements necessary to obtain final zoning approval of the work. This document is where the homeowner can become aware of any bonding requirements. It is essential that all of these requirements are completed, prior to the issuance of final payment to the contractor by the homeowner.

In summary, the homeowner has the ultimate authority and power on a construction project. They are the contractual party that is in control of the money. The party that is in control of the money leads the pack. DO NOT allow the contractor, architect, engineers or subcontractors to intimidate or attempt to convince you otherwise. It is essential that insurance, special insurance as well as bonding requirements are properly fulfilled on your construction project. You have the money, and must exert both the responsibility and the power.

If all of these requirements and responsibilities appear to be overwhelming and you are not willing or comfortable taking on the responsibility for, as we have repeatedly indicated within this website, the hiring of an independent construction professional is recommended. The other possible method of transferring the liability, as well as responsibility of ensuring that all insurance and bonding requirements are properly addressed, is to add this assignment to the architect. Unfortunately this assignment could generate a conflict of interests, due to the involvement of the architect regarding the development of the contract documents.

Insurance requirements are an extremely important part of the construction process. Like all insurance issues, lack of problems will cause the financial commitment as well as the time to manage the insurance and bonding requirements to appear senseless. However, if problems occur on the construction project, the proper management of all insurance and bonding requirements will pay dividends to the homeowner, both financially as well as the homeowner’s overall well-being.

Insurance and bonding are not fun and exciting responsibilities; however they are necessary for the proper management and owner protection on every construction project.
Be diligent and make sure you are legally and financially protected.