Insuring Your Home While Being Built – Construction Insurance
Even though insuring a home while it is under construction or being built is not directed by any laws, it is a must, especially if you finance all or a part of construction costs.
So, what type of construction loan insurance is required, and who is required to get it?
You may be one of the lucky ones whose insurance company covers your new home during construction under your standard homeowner’s policy. This will cover you for any damage to the house as it’s being built and may provide some coverage for theft of building materials.
Assuming you are not one of the lucky ones, there are three types of insurance needed to build a new home.
All banks require builders’ risk and general liability. Workman’s compensation is only needed if your builder has employees.
1. Builder’s Risk Insurance, also known as Course of Construction Insurance.
Builders risk insurance, specially designed to cover homes while they are under construction, protects the project itself from direct damage. Almost anything that can damage the project is covered. Typical policies include fire, lightning, windstorm, hail, and vandalism.
Lenders require the Builder’s Risk policy to cover the loan amount or the cost to build a new home that was specified on the appraisal. No bank will finance your home without this coverage.
This insurance doesn’t provide liability coverage or any protection for the home’s contents since there typically won’t be any personal possessions at the construction site.
A broader form of coverage is available, yet not necessary for minimum loan requirements, called “all-risk” insurance. It protects from every risk except those spelled out as exclusions.
Builder’s Risk insurance usually must cover at least 100 percent of the value of the home or the value of the total credit line on a construction loan.
Typically, if the new home is built on your lot, it is up to the homeowner to buy this type of insurance. Builder only insures it in the case the lot is in his name, and the title will be transferred to you at closing.
General Liability insurance is designed to offer specific protection against third party insurance claims, i.e., payment is not typically made to the insured, but rather to someone suffering loss who is not a party to the insurance contract. For example, neighbour’s kids are playing on the construction site, and one of them falls and brakes his leg.
You or your builder can provide this policy. This policy is a comprehensive general policy or a broad form liability endorsement. If the builder provides the insurance, a general policy of $1,000,000 or a broad form liability endorsement is required.
Owner builders are legally responsible for conduct and damages on the job site and can be sued for negligence. General contractors solve this problem through their General Liability Policy. Since this policy is a commercial policy, it can be very expensive for the owner-builder.
The arrangement as to who provides this coverage must be worked out between the homeowner and the builder. However, any reputable builder will usually provide a policy that has coverage for all potential accidents.
Ask your builder upfront if they have general liability insurance. Some builders cannot afford or do not want to pay for the insurance and then guess who has to provide it. You can save yourself a lot of money and headaches if you work with a builder that has insurance.
If your builder tells you he is not required to provide any coverage whatsoever, he is most likely correct because it is not a law to have insurance to build a house.
If the builder directly subcontracts out the work and does not have employees per se, they will need to write a letter acknowledging that they do not have employees and are not required to have WSIB.
However, if your builder owns his company and has employees that are helping to build your home, the workman’s compensation is required.
This coverage will protect the contractor and the workers who are working on the property.
If an employee is injured during the construction of a home and proper workers’ compensation insurance wasn’t funded, a worker can potentially come after both a contractor and a homeowner for damages.
Some of the financial institutions may ask for the builder to provide this insurance. So make sure you hire a reputable builder, it will help your construction loan close much faster.
As long as suitable workers’ compensation policy is in effect, the law states that injured workers may recover fixed insurance benefits but may not sue their employers. In some instances, owner builders are considered employers, so knowing who is responsible for the worker on-site is paramount.
In the case of sub-contractors providing workers for a project, they should already have a Workers’ Comp policy, and the owner-builder should not allow any work to be performed without proof of this insurance.
The booklet “Am-I-Covered” will answer most of your home insurance questions. Click here to download: Am-I-Covered