Insurance for New Construction Properties
Coverage Needs for the Owner and Contractor
by Shawn Woedl
With limited inventory and rising home values, the Build to Rent trend is gaining steam. A ground-up construction project adds complications when it comes to insurance. If you are an investor pursuing this approach, it is important to understand the risks and responsibilities for all the parties involved in the project so you can protect yourself and your investment against your exposures.
Where are you at risk and what coverage do you need?
As the owner of the property, your priority is protecting your financial investment. You should carry property insurance and premises liability. Your property insurance would cover physical damage to the property caused by the perils covered under your policy. The perils that are covered will vary based on the coverage form you purchase. Basic form covers such things as fire, storms, smoke, explosion, and vandalism. The causes of loss that are covered are listed on the policy. Some carriers (but not all) offer Broad form coverage which adds several perils, including water damage. Special form coverage is the most comprehensive coverage form as it covers anything that is not listed as an exclusion in the policy. One cause of loss that is only covered on a Special form policy that should be of particular interest to investors who are building a new home is theft. During the construction process the unattended property may be ripe for thieves looking to acquire such things as building materials or newly installed appliances.
For a property under construction from the ground up, you will want your property coverage to be a Builder’s Risk policy. This coverage can extend to any materials on site that you own but does not cover the tools or equipment of any contractors that are left on site.
When you purchase your property insurance, choose your coverage amount that is equal to the expected construction cost. The cost of the lot should not be included in this coverage limit. If a property loss occurs midway through the construction, keep in mind that the loss settlement cannot exceed your invested capital at the time of loss, which may be less than your total coverage limit. This is to ensure that you are not profiting from insurance, as its purpose is to indemnify and make you whole. Keep any receipts for purchases you make along the way to submit as part of the claim.
You should also carry premises liability (or general liability) to legally protect you if a third party is injured while on the property. Take for instance a group of kids exploring your construction site. One of them falls and ends up in the hospital. As the owner of the property, you may be sued for damages and medical expenses for the incident occurring on your property. Keep in mind—premises liability does NOT extend to injury of someone you have hired to work on the project and be on site.
What does your General Contractor need?
First and foremost, hire a general contractor (GC) who is properly licensed to complete the work for which you hired them to complete. The licensing requirements are specific to the state. Your GC should carry their own liability insurance to cover their business operations and their employees. At a minimum, this should include the following:
- Contractor’s General Liability: This covers damage to your property for which the contractor may be responsible. Importantly, it should include Products and Completed. This ensures that after the work is done, the GC is liable for any negligence in workmanship that leads to a lawsuit.
- Workers Compensation: If your GC has employees, they should carry Workers Compensation to cover injuries to those employees while on the job.
When hiring a GC to work on your project, require them to add you (whatever entity that owns the property) as an additional insured on their liability coverage. This does two things. First, it extends coverage to you if you are named in a lawsuit caused by their negligence. For example, your contractor cuts corners when installing a staircase railing and after you have placed a tenant, the handrail breaks causing your tenant to fall. This type of liability claim would be picked up by your general contractor’s liability coverage and not your premises liability, protecting your loss history and future insurance costs. Second, if you are listed on the policy, you will be notified if the coverage lapses or is cancelled while the project is still active.
Other coverages your contractor may consider includes:
- Equipment Floater: Coverage for the contractor’s equipment such a bulldozers, excavators, and tools while on your construction site.
- Commercial Auto: Coverage for the contractor’s vehicles while used during business such as hauling material or traveling between jobsites.
Each subcontractor hired by the contractor should carry their own liability insurance for the work they are contracted to complete. When purchasing a Contractors Liability policy, they will be asked to provide the Class Code for the work they are being insured to provide. The insurance agent they work with can help identify the appropriate code. The general contractor may want to require their hired subcontractors to sign a Contractual Liability/Hold Harmless Agreement, so they (and ultimately you) are not held responsible for damage or injury for which they are negligent. You may also ask the subcontractors to list both you and the general contractor as Additional Insureds on their liability certificates.
What if you are the owner AND General Contractor?
If you are serving as the GC on your construction project, your premises liability protection does not extend to your actions and work in that contractor’s role. More specifically, you would need to purchase the contractor’s general liability coverages listed above AND premises liability coverage for incidents that are not connected to the project. To obtain this coverage, you will need to obtain the proper licensing as required by your state. You will still want to hire subcontractors for more specialized services like electrical, plumbing, foundation and structural work. Be sure they have the proper licensing and insurance and have you listed as Additional Insured.
Ways to ensure a safe worksite
While it is important to have insurance coverage in case of incidents, it is equally important to be sure the construction site is maintained safely to mitigate the risk of such incidents. Simple steps like keeping the site tidy and free of hazards and wearing appropriate attire and Personal Protective Equipment can go a long way in protecting anyone on site, welcome or unwelcome.
Most of these principles as it relates to both safety and insurance apply to major renovation projects that involve a structural renovation and workers on site. However, for flippers acting as their own GC, insurers are hesitant to write contractor’s liability for fear they may cut corners to save a buck and wipe their hands clean once they sell. Be sure to discuss your project with your insurance agent and keep them up to date on progress or changes. If you increase the budget, let your agent know so you can increase your coverage amount. The coverage needed during the construction project is different than the coverage needed once the work is done, and the property is sitting vacant while being marketed for rent or sale. The coverage needs to change again when a tenant is placed. Always notify your agent of the project status, and work with an agent that is familiar with the correct coverage for investment properties and new construction.
