BUILDING, RENOVATING, REMODELING AND RESTORING: NAVIGATING BUILDERS RISK INSURANCE

Home construction was delayed by tornado damage  (Image via Wikipedia)

As a risk manager for numerous property owners, I am frequently encountering situations where Builders Risk insurance would benefit my customers.  Having recently left the world of normal people to enter the realm of insurance and risk management, I can still remember how confusing insurance can be.  Hopefully this will help someone to navigate the waters of Builder's Risk insurance.

For anyone who has ever decided to build, renovate, remodel, or restore a building, Builder's Risk insurance is generally a requirement of the loan.  However, even those who are working with their own funds can benefit from purchasing a Builder's Risk policy.

Here are some things that you can put together to help your agent provide you with the best Builders Risk coverage.

1. Projected Costs:  Maintaining a list of cost estimates and keeping your insurance agent updated as these costs change can help you ensure adequate coverage.
2. Project Details:  In providing detailed information, you can provide will help you agent "sell" the project to an underwriter.  Not only will it help you communicate better with your agent, it may help the underwriter conceptualize the project.  Underwriters are more likely to discount premiums when they understand what they are insuring.
3. Contracts:  Contracts frequently require certain limits of insurance.  In giving your agent complete copies of all contracts involved with a project, they will be able to provide you with appropriate insurance solutions.
4. Projected Dates:  It is paramount that your insurance agent is kept informed of projected start and end dates.  Shopping your insurance can take time and good agents will utilize that time to provide you with a combination of the best coverage and pricing.  Keeping them informed of your projected starting and completion dates will help them stay on track.
5. General Contractor:  Who is your general contractor?  Why did you select them?  A brief description of your general contractor and their track record can help "sell" an underwriter on your insurance and save you money.
6. Other Structures at the Site:  What other buildings or structures are at the site?  Will any of them be at risk of becoming damaged due to this project?  What is being done to protect the other structures?
7. Safety:  Provide your agent with a list of any safety precautions that have been or will be made.  Some items to consider are: lighting, fencing, and security.  Although, these features may reduce your premium, more importantly, they should reduce your stress level when the project is underway.
8. Storage of Building Materials:  Where will materials be stored before they are installed?  The basic ISO coverage for these materials only covers them if they are within 100 ft. of the scheduled location.  Additional distance from the site and additional storage locations may be added by endorsement.  What measures will be taken to prevent theft of these items?
9. Soft Costs:  When unforeseen events happen that delay the completion date of your project, additional expenses are usually incurred. These may be: additional interest charges on loans, advertising expenses, additional contractors costs, real estate taxes, consulting fees, equipment rental, premiums for extended insurance terms, refinance charges, and architectural and engineering fees.  Essentially, soft costs are all costs associated with a project except for labor and materials.

When should you shop for Builder's Risk insurance?  If possible, you should begin shopping three to four months before the projected start date.  This will allow your agent time to understand the project and to approach multiple insurance carriers, allowing them to compete for your business.  Be sure to keep your agent informed of any changes to your start date so that they can time the inception of the policy accordingly.The policy should begin when construction or demolition begins.  Once work is being performed, Builder's Risk insurance is the appropriate form of insurance.  Here's a handy flow chart to illustrate this.

When the project nears completion, make sure that your agent is ready to provide you with Property and General Liability insurance to take the place of the Builder's Risk insurance.

AVOIDING CONSTRUCTION DEFECTS THAT CAN DESTROY YOUR HOME

I have a friend who lives in a five year old manufactured home. About a month ago, He called me during a rainstorm because he couldn’t get his breaker box to quit tripping and cutting the power to half of his home. I thought he might be overloading the circuit, so we unplugged everything; but the breaker still tripped. I walked outside and saw an outdoor outlet on the side of the home. Making sure that the breaker was switched to the off position; I opened up the outlet and discovered that it was full of water. The weather seal had failed and the outlet was shorting out because of the heavy rain collecting inside. We didn’t have a replacement outlet at the time, so I capped the end of each wire with wire nuts and wrapped them in electrical tape.

My friend called me yesterday evening to help him install the replacement outdoor outlet at his home. In the process I noticed that the work box that housed the electrical socket was stripped where the screws went in to hold the new outlet securely to the home. I removed the work box and found a scary problem. The original installer of the work box didn’t ensure that other wiring was out of the way and the metal wings that hold the work box secure against the home had nicked the insulated housing of another wire when it was installed. Over the past five years, that nick just sat there. However, during the rain storm, when water entered the housing, the water must have entered the housing of the wire, causing it to short out and much of the insulation on the housing melted and burned away. No doubt, this time bomb was just waiting to burn down their home.

Thank heavens the original work box had been stripped, otherwise this problem would probably not have been caught in time.

Since this was a manufactured home, my friend was very detatched from the construction process of his home and unable to do anything to prevent this type of occurrence. However, there are steps that can be taken to avoid poor workmanship in the future.

• If you don't know how to conduct a repair or a new additon, do not perform the work yourself. Hire a professional contractor.
• Conduct a background check on any contractor you hire. Ask them for names of clients they've done similar work for in the past and then call those clients to see how they feel about the work that was performed. You may also wish to ask your contractor for a resume.
• Ask contractors for their credentials. Having special training or certifications that qualify them for the work that is to be performed generally results in a better outcome.
• Watch the work that as it is being done and feel free to ask questions. While this may not make you their best friend, contractors are less likely to take shortcuts when they are being observed.
• Hire a qualified inspector after the project has been completed to certify that it was done correctly. It is preferable to have the inspection done before you pay the contractor.

Remember that contractors are human and no matter how careful they are, defects can still occur. Additional steps can be taken now to help you in case you later experience trouble due to a construction defect.

• Ask the contractor for their license and verify that they are the qualifier on the license. Ask if any complaints have ever been filed against them.
• Verify that they are bonded for at least the value of the work they will be performing. While a performance bond won't pay for faulty workmanship, it can pay if the contractor leaves before the work is completed or if they fail to pay their suppliers. It is also a token that they are a respectable contractor, since bond companies don't typically issue bonds to contractors they don't trust.
• Ask the contractor to name you as additional insured on their liability insurance policy while they work on your project and obtain a certificate of insurance from their insurance company. Verify that their liability limit per occurrence is no less than $1,000,000.00.
• Verify that the contractor obtains any necessary permits for the work they will be performing.

Another topic worth mentioning is workers' compensation. It is possible that if someone is hurt at your home while performing work for you, the ensuing lawsuit may name you as a defendant. Verify that your contractor has a current workers compensation insurance policy and make sure that everyone who will be performing work is included in the policy. This should even include the general contractor. Obtain verification of this in writing.