Insurance during construction is composed of insurance on the home itself and additional insurance carried by the contractor. Generally, the contractor carries general liability, completed operations, auto insurance, workman’s compensation and various other coverages. For the homeowner the important coverages to confirm are the limits of the general liability insurances, confirming the contractor has workman’s compensation insurance and completed operations coverage. I will review these various coverages below.
General Liability Insurance covers the builders’ business operations as well as damage to property other than the home being built such as damage to a neighboring property. Most responsible companies should have this coverage, so I won’t spend further time discussing it.
Workman’s Compensation Insurance is required in Florida for all construction companies that have not filed valid Workman’s Compensation forms. Florida will allow a company with 3 or fewer officers/owners to exempt themselves from this insurance. This allows the company to save the costs for this policy, however, it also allows them to hire subs that don’t have Workman’s Compensation insurance. This can result in large savings for the construction company, however, the burden of the risk of worker injury is transferred directly to the contractor and homeowner. Presuming small companies who are not paying for Workman’s Compensation have limited assets, the real burden is borne by the homeowner. Many people are confused on what the exemption form means. The exemption form allows the company to legally operate without the insurance. It does not provide any coverage or replacement for the insurance. Companies that have Workman’s Compensation insurance are required by their policy to hire only subs with Workman’s Comp insurance (or they can accept a sub with valid exemptions). Without this insurance, the homeowner can be sued by workers who are injured working on the home. This can be a catastrophic event for a homeowner who did not fully understand or check the insurance of the considered contractor.
Completed Operations Insurance coverage provides protection for items that occur to the homeowners’ property after completion. Without this coverage, the burden of any warranty item is born by the contractor and/or sub contractor. Large costs can result in a contractor not being able to do the required work. This is an often overlooked coverage. For instance many water intrusions at decks and other areas may have multiple sources which contribute to the problem and if discovered after several years the damage may be well over $100,000 to repair. In these cases, subs may point the finger at each other and/or the contractor. The contractor may not be financially able to correct the problem himself without the subs help. Completed Operations Insurance covers the claim and then sorts things out with the subs and vendors involved later. The remaining insurance is specific to the house, the only question is who is responsible for purchasing the coverage. The main policy protecting a house under construction is called Builders Risk. This is the coverage that protects against theft, fire, and other actions to the house itself. Some of these policies will have wind protection built in and others will require a separate wind policy. The deductible is where the financial strength of the contractor comes in. Most wind coverage carries a large deductible which is 3-5% in most cases. So a contractor with four $1,000,000 homes under construction could have $200,000 of out of pocket damages on insured homes. Many cost plus contracts do not address who is responsible for these costs as well which can cause an enormous surprise.
Flood Insurance is not required by banks when the home is not in a flood zone (X zone). As we have seen in Houston and other areas, it is not uncommon for flooding to occur in areas not in a flood zone. Builders Risk insurance specifically does not cover any flood damages and most flood insurance is limited to $250,000 in damages. Replacement costs above these limits are borne by the contractor, so once more it is important to know who you are dealing with and what their financial capability really is.
After closing, the homeowner is always responsible for insurance coverages. If a bank is involved they will have requirements for insurance coverage and limits. In our area of coastal Florida I would encourage you to consider flood coverage whether you need it or not. If a bank is not involved the home owner must determine what limits and coverage they want to have. While home and wind insurance is expensive, replacement of a home is as well. While Irma’s direct hit on Collier County resulted in limited damage to newer homes, we can’t assume the next storm will have the same impact.