What is Construction Insurance?
Construction insurance protects your financial expenditures during the erection phase of a home or a commercial building. Unlike homeowner's insurance, which protects the property once it is occupied, construction insurance, frequently called builder’s risk policy, protects the developing structure and the materials purchased for the structure from loss due to damage or theft.
How Does It Function?
Purchased prior to starting the building process, this insurance policy covers a loss from damage due to fire, high winds or other factors not covered by the liability policy the contractor purchases. The insurance agency may ask for a copy of the home-building contract before issuing a policy.
What is the Time Frame?
Builder’s risk policies are in force for a period of one year or upon completion of the home, whichever comes first. If this period is less than one year, you may roll the remaining premium into a regular homeowner's policy or request a refund. If the home is still under construction at the end of the year, another policy will be issued.
Construction insurance will not cover the implied value of the structure; only the money expended to the point of the damage. For example, if a homeowner is building a $100,000 home but spends only $60,000 when a tornado destroys the structure, he will receive $60,000, even if he feels the home has more value at that point in construction.
Homeowners may mistakenly think a contractor is liable for damage caused to a home under construction, but that is only true if the contractor or his workers were negligent, resulting in the damage.
Working on Your Own Home
Most insurance construction policies exclude coverage for damaged caused by the homeowner. Owners may think they are helping the contractor by doing a little bit of the work themselves, but if their lack of building knowledge causes damage to the materials or the house, the insurance policy may not reimburse the loss.
A Word on Storm Damage
If a storm damages the structure while under construction, the builder, even if he is under contract to finish the home, is likely to pull off the job unless the owner and builder renegotiate a new price that includes the additional work required to rebuild the home.
Tips to Develop a Successful Construction Contract
One of the leading frustrations in home building is miscommunication and different expectations between the builder and the client. This is why it is strongly urged to have a contract drawn up. Many sample contracts can be found on the Internet. This will help reduce legal fees if a lawyer is consulted before the final contract is signed by both parties.
Here are the main items all contracts should contain:
> Exact location of the building site, including street, address, lot number, town, state.
> The contractor warrants he is licensed in the state (specify) and fully qualified to perform the work.
> A clear designation of the owner, the contractor, and the financial institution holding the escrow funds for payment.
> The contractor will provide all the labor, material, and equipment to perform the work within the specified time frame. All sub-contractors used on the project will be listed with their license numbers, and the contractor will supervise all employees and sub-contractors.
> Include as attachments to the contract the work write-up, contractor’s proposal, working drawings, and any other relevant attachments.
> A timetable that lists construction milestones and when payments are due to contractor only for work completed.
> A clause that obligates the financial institution to release qualified funds to owner to pay contractor when due.
> A clause that states no payment will be made for work not listed in contract. The clause should also include language as to how change orders will be communicated, agreed upon, and paid.
> A clause that states the financial institution is not obligated to release funds for work not specified in contract.
> A clause that states the financial institution is not obligated to release funds for work unless authorized by owner, arbitrator, or a Court.
> A written order to proceed clause that is issued by the financial institution on behalf of the owner within “x” days of the contract being signed by all parties. This order will contain dates when work is to start and expected to end.
> Who is to have what type of insurance? This includes workman’s compensation, property damage, general liability, automobile, and other relevant insurance. The owner should contact several insurance providers to shop around.
> A clause addressing who is responsible for damages/repairs and who will pay.
> Contractor is required to obtain permits, and language in the contract as to how inspections made by local building officials will be addressed and handled.
> How final payment will be made based upon completion certificate by owner and certificate of occupancy by building official.
> A clause stipulating conditional lien release forms from the contractor, sub-contractors, and suppliers prior to final payment. The contractor should provide you with unconditional lien release forms after final payment.
> How clean-up will be done by contractor.
> Guarantees and warranties by contractor for his work and length of warranties to address issues after house occupancy.
> Owner’s responsibilities to contractor.
> Conditions for termination by owner or contractor for cause.
> How disputes will be resolved. This normally involves clauses about mediation and binding arbitration consistent with local law.
The vast majority of homeowners have very positive home construction experiences. Taking the time to write out a contract with your builder will minimize any potential surprises down the road – and get you into your dream home even faster than without one.