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Building Your Own Home...Insurance Implications

Author: VU Faculty

It is not uncommon for a homeowner to serve as his or her own general contractor when building a new home. When doing so, there is an exposure to claims made by contractors and their employees if injured during construction. In fact, such claims can arise regardless of the homeowner's status as general contractor or owner. Does the HO policy cover these claims or is workers compensation coverage needed?

 

Question"Does and individual that is contracting construction of his own home need to buy workers compensation coverage? He will buy an ISO HO 00 03 10 00 policy with a builders risk endorsement. Would you suggest he purchase any additional liability coverage?"

Answer?This is a very common homeowners insurance question and often arises when an HO insured is acting as their own general contractor or even when they have hired a general contractor but fear suits from subcontractors and/or employees.

There are a number of issues that arise when building a new home, not the least of which is theft and the limitations contained in the HO policy. (As Thomas Jefferson once said, "To build is to be robbed.") However, in this article, we'll focus on the issue of liability claims for BI to workers that might arise during construction.

To answer the question above, depending on the situation, we'd say "maybe/possibly/probably." But, seriously, it all depends on the state's workers compensation laws with regard to whether or not a homeowner "needs" to buy WC coverage. On the other hand, even if he doesn't have to, it doesn't mean that buying it isn't a good idea...even where WC isn't mandated by law, it is often still a good idea to purchase it.

In most (if not all) states, a general contractor and/or property owner is liable for WC benefits to the employees of uninsured subs. Some (if not many) states exempt someone building their own home from this requirement...e.g., in TN and FL, there are specific statutes exempting someone who is acting as their own general contractor in building their own home from the law. In other states, this exemption may exist in statute, by case law, or by edict of the governing regulatory agency such as the department of labor.

So, the first step is to find out whether your state has a similar legal exemption from WC liability (check out www.workerscompensation.com for laws). If so, the insured can usually rely on their HO policy if it's an ISO-equivalent form. In general, the HO policy will respond to claims from injured workers if no WC coverage is provided or "not required by law to be provided."

The problem is that, even if the HO policy responds, the base liability limit is usually $100,000 or so. Obviously, someone falling off a roof and breaking his neck could file suit for millions. Of course, absent any absolute liability imposed by a WC law, the injured party would have to prove that the homeowner is legally liable...but who knows what a jury will decide? At a minimum, if the owner is going to rely on HO coverage, they'd better have a personal umbrella in place with pretty good limits.

The "insurance" option is to purchase WC coverage and, in many (if not most) cases, that's what should be done if someone is building his or her own home. (Actually, since I know several people who have built their own homes, I'd spring for the extra bucks to hire an independent GC who knows what they're doing...for many reasons.)

As you know, when you're buying a WC policy rated largely on the construction trade (framers, roofers, etc.), you could be talking about a sizeable premium, but that's part of the cost of building a home. If you got quotes from a general contractor, once you take a look at what you may have to pay just for the WC coverage, their bid might not seem so bad.

To keep the audited premium as low as possible (and for other reasons), the insured should also require every sub to provide WC coverage and retain the certificates for the WC carrier in order to deduct their payroll/costs from the premium basis. Meticulous, well documented record keeping is critical. In addition, it is a good idea for the insured to follow up with the agent or company on every single certificate to verify its accuracy...fraudulent and inaccurate certificates seem to be on the rise.

There should also be a real good construction contract in place with solid hold harmless agreements. As you can see, when you start getting into all of these issues (and many noninsurance issues), a good GC might pay for himself.

Our Florida association has an excellent article on this subject. While it's oriented towards Florida law, it will give you a good idea of the issues and how the can be addressed. To access the article, go here:

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