As we prepare to start construction, I have been calling around for quotes for the insurance that will need to be in place before we begin work and I’ve run into some challenges. There are two policies that you'll need to protect yourself if you are acting as an owner builder, one is Builders Risk insurance and the other is General Liability insurance. If you are hiring a general contractor, he or she is responsible for purchasing those policies.
We talked about Builders Risk and General liability insurance way back in episode 2 called
“You Could Save Money, Lots of Money, But Should You Build Your Own House?”
PoP Quiz: Do you remember the other name for Builder Risk Insurance? I know it’s been a long time since we talked about it, so don’t feel too bad if you can’t remember.
Well, the other name for Builders Risk Insurance is Course of Construction Insurance. And It covers loss or damage to the house under construction, as well as loss or damage of any of the materials and equipment used during the course of construction. Owner builders or builders should purchase enough Builders Risk coverage equal to 100% of the anticipated construction costs. So, if are building a $200,000 house, your Builders Risk policy should cover the full $200,000.
General Liability Insurance is the other type of insurance that you’ll need to protect yourself. General Liability safeguards owner builders or builders against potential lawsuits over accidents, injuries, and illnesses that occur on the job site. Lending institutions and building permit departments often require Builders risk and General Liability insurance.
Professional builders who employ subcontractors also need workers compensation insurance. Owner builders and general contractors who have no employees and simply hire subcontractors as independent workers typically don’t need to pay for workers comp insurance. Just check your state’s requirements to be sure.
Workers compensation is a form of insurance that provides wage replacement and medical benefits to employees who suffer job-related injuries or illnesses. In exchange for workers compensation benefits, the injured worker agrees not to sue their employer for negligence.
Since most owner builders will not have employees working on their homes, most states do not require owner builders to acquire workers compensation. In fact, in many states there are no legal requirements for small business owners and independent contractors to carry workers compensation.
A workers compensation waiver, also called a certificate of non-coverage, is typically used by independent contractors. With a workers compensation waiver, the independent contractor is declaring that he does not have workers compensation and waives any and all rights to file any workers compensation claims for himself or his workers against the builder or owner builder in the event an accident should occur while performing work on the job site.
Although in most cases as owner builder you will not need to obtain workers comp insurance, you should ask each subcontractor for their workers comp certificate for their workers or a certificate of non-coverage.
In addition to obtaining either a copy of the subs' workers compensation certificate or their certificate of non-coverage, owner builders should obtain a waiver of subrogation. Never heard of that? Neither had I.
Subrogation is a fancy word meaning an insurance company has the legal right to recover the amount it has paid out for a claim. They recover that amount they paid by pursuing the party that caused the loss or injury. So in the scenario of building a house, subrogation gives an insurance company the right to pursue the builder or owner builder if a subcontractor files a claim.
Owner builders should ask for a waiver of subrogation which keeps the subcontractors’ insurance companies from going after the owner builder if a subcontractor files a claim.
Owner builders and general contractors often insist on this waiver of subrogation provision because they want to protect themselves from being held liable to insurance companies for injuries that the subcontractors’ workers incur.
The waiver of subrogation endorsement states that the insurance company will not enforce its right to recover payments it makes to an injured worker from the person or organization listed on the endorsement.
To be clear, this endorsement and the waiver agreement do not stop the injured employee from suing the builder or owner builder. He still has the ability to sue the owner and general contractor for his injuries. But his insurance company can’t pursue you.
Insurance agents usually encourage owner builders and contractors to get waivers of subrogation to protect their liability insurance and reserve it for other potential claims.
Subcontractors usually do not resist giving a waiver of subrogation because they know may lose jobs by refusing to give the waiver.
Now, with that background information in mind, let me tell the problem that I came across when calling around for insurance quotes for my project.
As an owner builder, I called to get quotes for Builders Risk and General Liability Insurance. Most companies had no issues providing a Builders Risk policy to me as a non-experienced owner builder without a contractors’ license. But sometimes companies charge more for the Builder Risk policy because of my lack of construction experience. The lowest price I found for Builders Risk was 24 cents per $100 of home value. So for a $100,000 home, you’d pay $240 for Builders Risk. And for a $200,000 home you’d pay $480 for Builders Risk insurance.
So obtaining builders risk usually isn’t a problem for owner builders. The challenge came in finding a company who would provide a General Liability policy.
In my previous online research, I hadn't read anything about owner builders having trouble getting general liability insurance. Not one article said that would be a challenge. However, after calling around to about 6 or 7 different insurance agencies, I only found 2 that were willing to write a General Liability policy for me.
Most companies said they only write General Liability policies for licensed contractors or companies, not non-licensed individuals. And my hiring a experienced licensed contractor as a construction manager didn’t make them reconsider.
The rare company that would give General Liability insurance to me as an non-licensed individual said the policy would several thousands of dollars and said that they would reassess the price during the project and there was a chance I could be charged more depending on the amount of work being done by the subcontractors. Not only was I being charged an extremely high fee, but there was a chance I’d be charged even more after the insurance company audited the project.
When about 3 of the companies denied me a General Liability policy, I started to search the internet to find out if other owner builders had similar challenges. They did.
Many owner builders said they acquired Builders Risk insurance with no problem but that they had quite a bit of trouble getting General Liability coverage because they were told, like I was told, that General Liability insurance is for licensed professionals or companies.
I read about 2 main solutions that helped owner builders get the liability coverage needed. One is to build your house in the name of an LLC, a limited liability company. That does two things. 1) It allows you to get general liability insurance with no problem because it would be an LLC, a company, that would be insured. 2) building a house under the name of an LLC name, instead of your personal name, would limit your liability if you were sued because of accidents or injured incurred on your job site.
An LLC limits this personal liability because an LLC is legally separate from its owners. LLCs are responsible for their own debts and obligations, and although you can lose the money you have invested in the company, personal assets such as your home and bank account can’t be used debts or lawsuits.
There may even be advantages with supplies and subcontractors if you build your house under the name of an LLC. The LLC name may convey to material suppliers and subcontractors that you are a big shot company with plans and assets to build more homes in the future. If they think that, they may be willing to give you larger discounts. Although we never want to be dishonest about our status as owner builders, we also don’t have to volunteer that information. Most state government websites let you file for an LLC online. Just google “form an LLC” and the name of your state. It’s usually super simple. Alternatively, you can go to a site light legal zoom or talk to a lawyer about forming a LLC. Those options will obviously be more expensive. But before you go to all that trouble, make sure building under the name of an LLC is allowed by your lending institution and your building permit office. You might also get some advice from a lawyer.
The second option available for owner builders having difficulty acquiring General Liability insurance is to get a homeowners policy with an “under construction" or "course of construction” endorsement, which usually has a general liability policy associated with it. No all insurance companies will offer such a policy, but State Farm is the company that many owner builders seem to use.
The State Farm product is like a combination homeowners, general liability and builders risk policy rolled into one. This homeowners policy with an under construction endorsement does not use the term builders risk, but the policy I got a quote for covers materials lost or damaged during construction, just like Builders Risk insurance. This policy will also cover injuries and accidents on the job site, and then rolls into a regular homeowners policy at the end to construction. The policy I was quoted, with discounts for bundled home and car insurance, cost less than $2000 for the year. Of course, the price of the policy will vary with the amount of coverage you need and the deductibles you are willing to pay. Talk to an experienced insurance agent, read your policy quote carefully and maybe even consult a lawyer about what type is coverage you should acquire.
You should also consider getting an umbrella insurance policy on top of everything else. Umbrella insurance is extra liability insurance. This type of insurance policy is designed to help protect you from major claims and lawsuits. It provides additional liability coverage above the limits of your homeowners and auto insurance policies. This protection is designed to kick in when the liability on these other policies has been exhausted.
In most cases, personal umbrella policies are available in million-dollar increments, from $1 to $5 million. While an umbrella policy is not required, it may offer increased protection in the unfortunate event of an accident. An umbrella policy will not only cover you against job site accident, but against accidents as well. The coverage is not extra coverage for the insured (you). It’s extra coverage for those that are injured by you or on your property. Most umbrella policies are pretty inexpensive for what you get. A million dollar umbrella policy will probably only cost you a few hundred dollar per year.
So, to summarize, as owner builder, you probably won’t have trouble getting Builders Risk insurance, although you might pay more for it as compared to an experienced contractor. You probably will have a tough time acquiring General Liability insurance as a non-licensed contractor and non-business entity.
One solution is to hire a builder and not be an owner builder and let the experienced builder deal with the insurance. Or you can get your building permit and General Liability insurance under the name of an LLC (if that's allowed by your bank and building permit dept). Another option is to look for a homeowners policy with a course of construction endorsement. Many owner builders used a State Farm policy because it covers loss or damage to materials, like a builder risk policy, and injuries and accidents during construction, like a general liability policy, then rolls into a more traditional homeowners policy after construction. In addition, you might consider getting a personal umbrella policy which is like extra liability insurance.
Warning here: this information pertains to policies that I have personally researched. Make sure the policies you choose appropriately protect your against lost and stolen materials and against lawsuits for job-site accidents and injures. In addition, don’t forget to get copies of insurance certificates from all subcontractors, including waivers of subrogation and workers compensation certificates or certificates of non-coverage. To be extra diligent, you can call the insurance companies to verify coverage and ask them to inform you if there is a lapse of payment which would cause a lapse of coverage. Plus, you can ask subs to add you to their insurance policies as the "additional insured".
Please remember that the purpose of this podcast is simply to educate and inform. It is not a substitute for professional advice. The information that you hear is based the only on the opinions, research and experiences of my guests and myself. That information might be incomplete and it’s subject to change, so it may not apply to your project. In addition, building codes and requirements vary from region to region, so always consult a professional about specific recommendations for your home.
Thanks for stopping by. I hope my insurance challenges will help you to avoid your own insurance challenges.