Last Monday I introduced David and Deb (not their real names). They’re a couple who just purchased a home in east Dallas they plan to completely renovate. The home was originally built in 1962 and has never been updated. They’ll gut it and bring it up to date in a contemporary style befitting the original vision the architect had when it was first built.
The question when conducting a major remodel like this is how to best insure it (reference for last week’s post). The two methods I covered last week included:
- A vacant remodel policy if the home will be vacant during the remodeling process
- Using a standard home insurance policy if they will live in the home during the course of the remodel
There’s actually a third way to insure a project like this and that’s builders risk insurance. Builders risk is an excellent choice for:
- Major renovation projects
- Tear down of the existing home & building a new one in its place
- Complete new construction on a vacant lot
I typically recommend a builders risk policy over a vacant remodel policy in a couple of instances:
- The home owner will be the general contractor
- The general contractor hired by the home owner does not carry a commercial general liability insurance policy
When the homeowner is the general contractor, meaning they are hiring the sub-contractors, procuring materials, cabinetry and fixtures for the renovation project, etc., a builders risk policy is clearly the way to go for three reasons:
- They are typically structured on a replacement cost basis
- They cover the home, materials, tools, and supplies on site
- They can carry higher liability limits should something go wrong
Having the home covered on a replacement cost basis takes into consideration the value of the home before the project started, the cost of the project and the projected valuation of the home once the project is completed. The perils a builders risk policy protects against include the standard such as fire, theft, vandalism, water damage, as well as wind and hail unless the home is in a coastal area that requires a separate wind policy.
Materials and supplies are covered the moment they’re signed for and delivered to the home. At this point they become a part of the project whether installed or not. The higher liability limits protect the home owner in two ways:
- A worker or someone else, invited or not, is injured on site and sues you for negligence
- A neighbor’s property is damaged as a result of the project (a tree falls on a neighbor’s car or home while being cut down, etc.)
Liability limits can be written for $500,000, $1,000,000 or more if need be. Ultimately, if the home owner will operate as the general contractor, then start with a builders risk policy to be completely protected.
The other time a builders risk policy should be purchased is when the home owner hires an uninsured general contractor. If the general contractor will not carry insurance to protect themselves in the event of something going wrong, then the home owner should protect themselves against that possibility. If someone gets hurt, there’s a good chance a lawyer will come looking for someone to pay and that will be the home owner if the general contractor doesn’t carry liability insurance.
I personally don’t recommend hiring a general or sub-contractor who doesn’t carry insurance. Even when hiring an insured contractor, general or sub, the home owner should require two things:
- A certificate of insurance from each contractor showing proof of current insurance
- Have the contractor name the home owner as an additional insured on the contractor’s policy
Having the contractor list the home owner as an additional insured helps cover the home owner in the event of a loss while on the project. It also means the contractor’s policy is the first policy to be used for a claim payment before any policy of the home owner is tapped.
The advantages of the builders risk policy over a vacant remodel policy are:
- Most builders risk policies are set up on a replacement cost basis while vacant remodel policies tend to be actual cash value policies
- Builders risk policies are usually able to carry higher limits of liability coverage
Builders risk policies are designed to cover the home up to the point the project is completed. This can be determined to be the earlier of:
- When the home sells such as when it’s being flipped
- When it’s ready for occupancy (a final inspection and certificate of occupancy may be required by a local agency)
- When the policy ends
If the home is being renovated to be occupied: once the project is completed, the builders risk policy should be replaced with a standard home insurance policy.
Do you have a question, comment or experience to share? Share them with me in the comments section of our blog or on our Facebook page. I’d love to hear from you.
