Start-up builders often ask us what policies they need to carry. We frequently get the same question from long term builders looking to trim their expenses.
Builders may need up to nine different insurance polices and/or bonds depending on their situation, activities, and tolerance to take out-of-pocket risks. At a minimum, almost all builders will need Workers’ Compensation, General Liability, and Builders Risk. Other policies that are commonly carried include Property, Business Auto, Excess or Umbrella, License and Permit Bonds, Performance Bonds, and Home Owners Warranty products.
Why all these policies are needed
Some of these policies, such as Workers’ Compensation, Auto Liability, and License or Permit Bonds, are required under state or local law. If you don’t carry these policies you face serious fines and sanctions.
The builder’s bank or lending institution will always require proof of Builders Risk to secure the value of the new start or project for which they have extended the loan. Banks also want to make sure that they’re lending to a legitimate business – no legitimate business would operate without Workers’ Compensation and General Liability.
In the case of custom jobs, project owners want to make sure that the builder is a legitimate business and adequately insured with all of the customary policies including Workers’ Comp, General Liability, Business Auto, and Builders Risk. In rare cases, a residential property owner under a custom contract may require a Performance Bond to guarantee that the job will be completed according to the terms of the contract. This is more common in commercial construction.
Many builders want to voluntarily carry these policies because it makes good business sense and they want to protect their assets in the event of worker injury, a lawsuit, or a property loss. Many want to go beyond what may be required by carrying an Excess Liability or Umbrella policy and a Home Owners Warranty.
Workers’ Compensation pays benefits to your employees and the employees of your uninsured subs who are injured on the job.
Benefits include payment of medical expenses (both past and future), lost wages (usually up to 66.66% of the average weekly wage for a maximum number of weeks as prescribed by state law), lump sum benefits for certain partial or total disabilities, disfigurements, and a death benefit that is prescribed by state law.
The benefits under Workers Compensation are extremely broad and can be paid out over a number of years.
The cost of this policy starts out at a minimum premium around $1,000 and total estimated premiums range upward, depending on your projected annual employee payrolls and amounts paid to uninsured subs. Many of our smaller builder clients who use all insured subs pay less than $5,000 per year in premium, whereas some of our larger builders pay over $75,000 per year. Since there are so many factors involved, the only way to know your likely cost is to get an actual quote.
When the policy is set up, the estimated payrolls and amounts paid to uninsured subs tend to be inaccurate. For this reason, the final premium is subject to an audit at the end of the policy year. The audit is necessary to determine your exact exposures so that a fair premium is charged.
We suggest viewing of our video that explain the Workers’ Compensation policy in much more detail, including the important issues of how to collect certificates of insurance from your subs, how to deduct from uninsured subs, and how to prepare for your audit.
General Liability protects the builder against certain claims and lawsuits alleging that the builder’s negligence resulted in bodily injury, property damage, or personal and advertising injury to a third party. A third party is someone such as a visitor, trespasser, neighbor, another contractor on the job, a competing builder, the buyer, or a subsequent purchaser.
The policy pays for the costs of legal defense, settlements, and adverse jury verdicts and covers the individual business owners and employees in addition to the business entity.
Please note that the insurance industry eliminated important coverage for construction defect. Your actual policy coverages for construction defect claims will depend on your carrier and the coverage options that you’ve selected.
The minimum premium for General Liability starts out in the $750 to $4,000 range and the total estimated premium goes up from there depending on your annual projected payrolls, amounts paid to uninsured subs, and amounts paid to insured subs. Some of our smaller builders pay under $2,000 a year and a few of our larger builders pay over $50,000 a year. The only way to know your likely cost is to get an actual quote.
Just as with Workers’ Comp, these projections tend to be inaccurate and as a result the final premium is subject to audit at the end of the policy year.
We have a video explaining General Liability in more detail, including the important issues of construction defect litigation and contractual transfer of liability to your subs.Business Auto
Builders who own three or more vehicles typically purchase a Business Auto policy because they qualify for fleet discounts. A Business Auto policy typically provides higher limits of coverage, as well as the option to add Non-owned and Hired Auto Liability, which is highly recommended.
Builders who own one or two vehicles sometimes purchase a Personal Auto policy, which can be less expensive but provides more limited coverage.
Non-owned Auto Liability covers a builder’s vicarious liability for when an employee or subcontractor uses their personal vehicle to run an errand on behalf of the builder. If he or she gets in a wreck and injures someone else and is uninsured or only carries minimum limits under their own auto insurance policy, the builder can be shotgunned into a lawsuit. The builder must carry Non-owned Liability in order to be protected.
Hired Auto Liability protects the builder when he rents an automobile for business purposes or a special vehicle for a particular job.
Non-owned and Hired Auto Liability can often be purchased on a stand-alone basis for a charge of around $250 a year.
Excess Liability and Umbrella policies are a major source of confusion among builders.
The terms “excess liability” and “umbrella” are almost interchangeable now in the insurance industry. Historically, an umbrella policy provided much broader coverage than an excess liability policy, but that is no longer the case in most instances.
Many builders believe that the policy is a catch all that covers all claims not covered by the other policies. This is just not true.
Many builders also believe that their Personal Umbrella policy, which supplements their Homeowners Liability and Personal Auto policies, protects them if they are sued for damages arising out of their business operations. This is not true either.
You must have a Business Excess Liability or Commercial Umbrella to protect your business operations.
What the policy does is extend the limits of your underlying policies to a higher limit in increments of $1 million. It can extend the limits of your existing Auto Liability, General Liability, and Employers Liability policies.
The reason you would want to carry an Excess Liability or Umbrella policy would be if there is a serious high-dollar claim and the limits of coverage of your underlying policies are not high enough to take care of the damages. In this case, you would have to come out of pocket to pay for the difference and this could result in bankruptcy.
The additional limits provided by an Excess Liability or Umbrella policy can provide peace of mind for a relatively inexpensive cost.
The Builders Risk policy is sometimes referred to as “course of construction insurance.” It’s a temporary property insurance policy that protects the new housing start or other job in the event of damage while the job is in progress.
It protects against perils such as fire, theft, vandalism, wind, hail, and collision with auto. The builder should insure each job for an amount equal to the replacement cost value of materials, labor, overhead, and reasonable profit.
Coverage ends when the job is completed, sold, or occupied by a tenant. When coverage ends, a permanent property insurance policy should be taken out by the new owner.
Property Insurance covers the property that is titled in the name of your business such as your building, its contents, and equipment.
Coverage limits for building and contents should be set based on their replacement cost value and should protect against perils such as fire, theft, vandalism, wind, and hail.
A special Contractors’ Equipment policy should be taken out to cover the value of your equipment that leaves your premises and travels to the job site. This policy can be customized to extend to rented and leased equipment as well.
A Crime policy should be taken out to protect against embezzlement of funds or other theft of equipment or materials by you own employees.
License and Permit Bonds are required by state governments or municipalities such as towns, cities, or counties to guarantee that your construction will comply with the applicable building codes and regulations.
If the authorized building official finds that your construction is not in compliance, a demand for correction can be requested. If you don’t fix the problem, the bonding company will step in and can either hire another contractor to correct the problem or pay up to the bond limit. The bonding company will then file a lawsuit against you to get reimbursed for their expenses. As a result, the bond really doesn’t protect you, it only protects the owner and governmental entity.
In South Carolina, the state requires all residential builders to carry a bond limit of $15,000 and the cost for this bond for one year from the various bonding companies can range from $100 to $225 and even higher if your credit rating is poor. Other states may require higher limits of coverage. If so, the cost of the bond will be higher.
Also in South Carolina, the municipality where the construction occurs typically requires its own bond limit of $2,000 or $2500 and the cost for a 3-year bond with a leading bonding company is $250. This is typical of the requirements and bond costs in other states.
The project owner in commercial construction will often require a Performance Bond. On rare occasions, a residential homeowner will require a performance bond on a large custom job.
This type of bond guarantees that the work will be completed in accordance with the contract terms. In the event that the bonded contractor does not complete the job due to lack of finances, death, or other problems, the bonding company will find another contractor to complete the job and will look to the original bonded contractor for reimbursement.
If you’re a homebuilder, it will be difficult for you to qualify for this type of bond, especially if you build spec homes, which are considered by the bonding companies to carry a high financial risk. In addition, the application process is exhaustive with the requirement to complete multiple financial statements for your business and individual owners, as well as a work in progress report. This type of bond usually requires personal indemnification by the individual business owners and may require spousal indemnification as well.
Homeowner Warranty products are typically used for new home construction, but products are now available for remodeling jobs and some commercial construction.
The warranty provides protection to the homeowner in the event the builder goes out of business or retires and is not able to correct construction problems. It provides a mechanism for the warranty company to address construction grievances and make necessary corrections.
The warranty protects the builder by superseding implied warranties under state law and replacing them with a written warranty. ,It also protects the builder by forcing construction disputes into binding arbitration which can be less expensive and more favorable to the builder in many circumstances. However, not all warranty contracts force disputes into binding arbitration as arbitration may be voluntary with some providers.
Typical warranty terms provide protection against construction defects for workmanship for one year from the sale, major structural systems for two years, and structural defects for 10 years.