The housing market is booming, and prices keep going up. The National Association of Home Builders Housing Market Index, which measures builder confidence, has hit record numbers.
Builders have been scrambling to keep up with demand, while homebuyers have been stressing over lack of inventory, skyrocketing prices and building material shortages that are causing project delays.
With so much riding on new construction, builders and their customers need to be sure they have enough insurance to cover all the risks of building a new home. Homebuilders also need to make sure they are covered if they incur property damage, face liability lawsuits or experience workers’ compensation claims.
Builders risk insurance protects new construction projects
New construction projects pose risks similar to those relating to existing dwellings, but standard property insurance may not cover all your exposures. A fire could severely damage a home before it’s completed, or someone might walk off with valuable materials from the job site.
Luckily, builders and owners can take out a policy known as builders risk, or course-of-construction, insurance. This type of policy insures your project while it’s being built. A builders risk policy covers property losses, including building materials, supplies and equipment, whether on site or in transit. The coverage is in force until the project is finished.
Like property insurance, builders risk can be written on an “all perils” basis to cover any number of risks, including hurricanes, earthquakes, lightning, fires, explosions, sewer backups and theft.
In addition to covering these “hard costs,” builders risk insurers also offer the option of covering “soft costs.” Soft costs are the out-of-pocket expenses associated with a claim. For example, you might have to pay additional interest on a loan if a project is delayed. Other soft costs include insurance, real estate taxes, bond and permit fees, legal and accounting expenses, and advertising expenses.
“Loss-of-earnings” insurance can also be added, which covers loss of rent or use of a building if there is a delay.
Homeowners need builders risk for new construction, too
Homeowners who hire a contractor to custom build a home have some of the same risks as a builder. This is why it’s important for all parties with a financial interest in a project to be named as insureds on a builders risk policy. Unlike first-party property insurance, there can be multiple parties named on builders risk coverage. Typically, these are owners, general contractors, subcontractors and lenders.
Owners may be able to purchase an addition (called an endorsement) to their existing homeowners policy for a new home under construction. These endorsements offer many of the coverages found in a stand-alone builders risk policy, and they extend homeowners liability coverage to the new house. However, an endorsement may have lower limits than a builders risk policy.
Whether you’re an owner or a builder, you should consult with an insurance professional about the coverage you need. Keep in mind that houses are now taking longer than expected to complete. Nearly all new construction is experiencing delays. Make sure the policy you purchase allows you to extend the period of coverage.
Also, consider a rider that adjusts your limits as the value of the project goes up. With building material increases and change orders, projects usually end up costing more than expected.
General liability for homebuilders
Homebuilders face significant liability risks. These include injuries at the job site, exposure to hazardous materials, property damage and faulty work. Commercial general liability (CGL) insurance protects against legal claims resulting from bodily injury, property damage and personal injury that occur during the course of your normal business operations.
For example, if a homeowner visits your construction site and slips and falls, CGL would cover the claim. If one of your workers accidentally starts a fire that destroys all of the wood framing, your CGL policy would cover the damages. If you’re sued for slander or copyright infringement, you’re also covered.
CGL also pays for medical expenses, property damage, attorneys fees, judgments and settlements. However, CGL doesn’t cover your employees if they’re injured. For that, you need workers’ compensation insurance. CGL doesn’t cover professional or employment practices liability, either, but you can buy those policies separately if you need them.
CGL is an essential coverage for contractors. Many project owners require proof of CGL insurance, and you may need it to get a general contractors license. Oftentimes banks also require CGL coverage to get a loan or a line of credit.
For large construction projects involving multiple subcontractors, consider purchasing a wrap-up policy, also called a controlled insurance program. With a wrap-up, all of the insurance that you and your subcontractors need is wrapped up into one policy. These policies are centrally purchased and controlled by the owner of the project or the general contractor.
Most wrap-ups include CGL and workers’ compensation insurance for the parties who need them. The CGL component covers all liability risks for the project. Wrap-ups also give you the option of adding other coverages such as builders risk, subcontractor default, professional liability and excess liability (umbrella) coverage.
Workers’ compensation insurance
You’ll need to purchase workers’ compensation insurance for your employees and make sure your subcontractors also have it for theirs. Workers’ comp provides benefits if one of your workers is hurt on the job.
You should be able to purchase workers’ comp from a regular insurance company. However, if you’ve been turned down because of high risk or too many claims, you’ll need to buy coverage from your state’s assigned risk pool.
Keep your claims (and premiums) down by establishing a health and safety program for your workers. Always follow Occupational Safety and Health Administration requirements for construction.
Commercial auto and property insurance
You’ll need to get commercial auto insurance for your vehicles. Even if you drive your own truck, it still needs to be commercially insured if you use it for business. A commercial policy will allow you to name your employees as additional insureds so they can drive your vehicles.
You’ll also need commercial property insurance to protect any business property you own, such as a building, computers, office equipment and supplies, tools and materials. You may need to purchase a separate inland marine policy to cover property you transport to a job site. And you may need insurance to cover any heavy equipment you lease or buy.
It’s an exciting time for new-housing construction, but there are also many risks. Upswings in material costs, labor shortages and supply chain disruptions mean price uncertainty and delays. Whether you’re a builder or an owner, make sure you take care of your insurance needs before you put any shovels in the ground.
The insurance advisors at JAISIN have years of experience in commercial policies. They can help you decide if you need environmental insurance for your business.
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