Some Comments on Construction Projects
Originally published Fall 2018
We recommend that clients contact us during the planning phase and provide us with a copy of the construction contracts to submit to the insurance company for review.
While every project is different, we have seen three areas for potential problems:
1) BEFORE ANY WORK BEGINS:
Obtain a Certificate of Insurance from the contractor.
Review the contractor's certificate of insurance to be sure the limit of insurance coverage is adequate. The certificate of insurance is typically a one-page document issued by the contractor's insurance company that gives basic details of the coverage provided. The project cost might be $300,000 but the total exposure could be much more:
If you have a $3 million home and the contractor carries $1 million of general liability with no excess limits, there will not be enough insurance to cover your home if it burns down and the contractor is held responsible. Your insurance company might be unable to recover the amount of the claim that they paid. This may not matter to you, but requiring the contractor to have sufficient limits may be a stipulation of your insurance company.
Be listed as an Additional Interest on the contractor's policy.
If possible, use the following language: Certificate holder and owner are named as additional insured with respect to general liability, including ongoing and completed operations coverage.
Typically, when an individual or entity is listed as an "additional interest" on the contractor's policy they are included in the contractor's coverage for that specific location for the duration of the project. This is a prudent measure to take, but such protection is only as good as the provisions of the policy and the quality of the insurance carrier. It is not a substitute for protection under your own insurance program.
Your contractor's insurance should include completed operations coverage; this covers damage caused by the contractor or material defects that is revealed after the work is completed (see number 3 below).
Ask your insurance advisor to check on the financial rating of the contractor's insurance. You should insist that your contractor's insurer have an AM Best Rating of A- and check that the policy limits are high enough to cover the replacement value of your home, but be aware that some contractors are unable to secure limits above $5 million.
2) AVOID AGREEING TO A WAIVER OF SUBROGATION CLAUSE.
Construction and renovation contracts are typically written to benefit the interest of the contractor and tradesman, not the client. We regularly see contracts which include a "waiver of subrogation" clause. In insurance, subrogation is the right of the insurance company, having paid its policyholder for a loss, to assume the rights of the policyholder and try to recover some of its money from any other party that may be liable. For example, if during construction a fire causes extensive damage to the project, your own homeowner's insurance policy should pay for the loss. But your insurance company may feel that the contractors or subcontractors were responsible for the loss and seek redress from them or their insurance company. However if you have waived, or surrendered, your right to subrogate, your insurance company could be prevented from attempting such recovery.
Usually, the issue of subrogation is resolved with both parties agreeing to retain their rights of subrogation, meaning each party will retain the right to recover damages from the other party. In a typical construction project it is unlikely that the client visiting the site a few times a week will be the cause of any loss. It is far more likely that an error by the contractor or subcontractor could result in a property loss. If you are undertaking a construction project, avoid picking up any hammers or giving direction to any workers! More seriously, agreeing to a waiver of subrogation may actually invalidate coverage on your homeowner's policy— which is almost certain to be broader than the contractor's insurance. Because your insurance company will normally be first to pay a loss, it will not want you to waive the right to recover damages from another party.
3) CONSTRUCTION DEFECTS ARE NOT COVERED BY YOUR HOMEOWNERS POLICY AND MAY NOT BE COVERED BY THE CONTRACTOR'S INSURANCE EITHER.
One of the most devastating outcomes for a homeowner is to discover that faulty construction caused damage to the home and worse, that the homeowners policy excludes this coverage. Ensuing damage may be covered but the repair or replacement of the faulty work is generally not covered by the homeowners insurance or by the contractor's insurance. Recourse for faulty construction is generally limited to the contractor which is why completed operations coverage (mentioned above) is so valuable. Unfortunately, this coverage is only available through the contractor's insurer.
One example is water damage from an improperly installed roof. The interior water damage may be covered under the policy but replacing the roof may not be. We recommend hiring a construction manager or a forensic architect to oversee the project and ensure that the project is completed according to the contract.
Don't assume your homeowners insurance policy will cover the home during the construction phase, especially if you have to move out of your home, or if you are building a new home because the terms and conditions may change during construction if the insurer is not notified. Therefore it is important you notify your agent, in writing, about the type of work being done and request coverage for the project. The insurance company may require a separate "course of construction" policy for the duration of the project.
Chartwell Bulletins are produced by Chartwell Insurance Services, Inc., an independent insurance broker specializing in the personal asset protection of high-net-worth individuals. Chartwell Bulletins address issues of general interest and since coverages vary by company and by state should not be taken as an interpretation of a particular policy or advice on any individual situation.
A representative of Chartwell Insurance Services will be pleased to discuss all aspects of your personal insurance.
Contact: Rebecca Korach Woan 312-645-1200 or rwoan@chartwellins.com