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Insurance for Your Remodel – Something No One Thinks About Until a Catastrophe Happens.

Construction & Contractor Disputes and Real Estate Law by Peter N. Brewer, Esq.

My colleague Charlie Bronitsky has been sharing tips for revising home improvement contracts and working with General Contractors.

As The Homeowner, Make Sure You Are Insured

Today’s article is inspired by a Chris Grammar of Allied Brokers.  Chris writes:

“Remodel contracts:  When signing a contract to remodel or build a home with a contractor make sure that they are the deep pockets not you.  Add to your contract that the General Contractor (GC) should add the homeowner as an additional named insured on his liability policy and provide a Certificate of Liability and workers compensation insurance. The certificate should require that you are given 2 weeks prior to notice of cancellation. Your contract could also allow that if insurance is not in place that work must cease or that the homeowner can purchase replacing coverage at the contractor’s expense.

By taking these steps the contractors insurance protects you from a lawsuit or employee injury. At the same time your homeowners insurance gives you an extra level of protection.”

As Charlie noted previously, a homeowner should first check the GC’s license status with the California State Contractor’s License Board.  When you do this online, you will also be able to see that the GC carries worker’s compensation insurance.  However, if you see that the GC is “exempt” – this is a red flag for the homeowner’s attention because the GC is likely claiming exemption from carrying worker’s compensation because they claim no employees.  However, if a GC is about to sign on with a homeowner, the GC is very likely going to have employees and bill the homeowner for the time.  A GC may be planning to use all subcontractors, each of whom should have their own license and worker’s compensation insurance for their employees but unless the GC is a one person shop and that one person is planning to personally come to the job site every day to supervise, they very likely will be having at least one employee to act as the foreman.  That means, the GC MUST carry worker’s compensation insurance—and as Chris Grammar noted, add the homeowner as an additional insured to the Comprehensive General Liability policy for the duration of the job.

Chris has referenced 3 types of insurance above:

  1. Comprehensive General Liability;
  2. Worker’s Compensation; and
  3. Homeowner’s Insurance

However, if the improvement contract is for a new house on unimproved land, then the owner would not have “homeowner’s insurance” yet and instead should look into a “Builder’s Risk” policy with their broker. **

Help Avoid Liability by Not Paying Sub-Contractors Directly

Chris further suggests, “Never pay subcontractors direct, always have the general contractor pay them.
This way you leave the primary liability on your general and his insurance.
Weird but true example; 5 years ago a client had hired general contractor to remodel his home. Then the homeowner heard about cabinet maker that did really great work at a great price. Instead of having the general retain the artisan, the owner paid the artisan direct, making him the employee of the owner. 4 days later this highly skilled and uninsured worker cut off his thumb and 2 fingers. Luckily the doctors were able to reattach the digits and for less than the Homeowners $500,000 policy limits.”

This payment policy is typical in the industry because most GC’s would like to collect weekly and pay out their subs and employees immediately.  Make sure to obtain lien releases and make your contract with the GC spells out the GC’s obligation to get you the homeowner your lien releases with each payment milestone.

Additionally, the Contractor’s State License Board suggests homeowners pay remodel bills with joint checks to the GC and the sub.  If you are going to do that, make sure to check with the insurance company that such a payment would not jeopardize coverage of the GC’s policy.

Make Sure the Amount of Coverage is Sufficient

One last tip from Chris, “Make sure the Contractors policy limits exceed the completed value of the home. Most polices have a $1 million limit but you can add an additional amount for a nominal cost.
Weird but true example. Several years ago a very large home was under construction in Palo Alto valued at $12,000,000. After 2 years of work and just weeks before completion an electrical fire burned it to the ground. Fortunately the general had adequate limits and there was enough money to rebuild.”

This article is not intended to be an exhausted list of insurance policies available for a remodel job, but is intended to give homeowners some understanding of important issues to consider before commencing construction.  If you are considering a remodel or new construction and wish to review the contract with us, I invite you to work with one of knowledgeable attorneys here at the firm and contact us at 650.327.2900.

** If by some miracle the job is finished early, or at least before the term of the insurance policy, it may be possible to terminate the policy and a pro rata refund of the premium paid in advance.

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