With the approach of spring, many of our clients are planning construction and renovation projects. We recommend that clients contract us prior to committing to a project and provide us with a copy of the construction contracts to submit to the client’s insurance company for review.
While every contract is different, we have seen two areas for potential problems:
1) BEFORE ANY WORK BEGINS:
a) 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.
b) Be listed as an Additional Interest on the contractor’s policy
Typically, when an individual or entity is listed as an “additional interest” on the contractor’s policy they are included in the policy 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 getting protection under your own insurance program. Ask your insurance advisor to check on the financial rating of the contractor’s insurance. If the insurance company is financially weak, the policy limits are too low or the coverage provisions too restrictive, you might reconsider hiring that particular contractor.
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.
Don’t assume your homeowner’s 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. 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. We also recommend that you request a response in writing from your agent.
Chartwell Bulletins are produced by Chartwell Insurance Services, 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. If legal advice or other expert assistance is required, the services of a competent professional should be sought.
A representative of Chartwel Insurance Services will be pleased to discuss all aspects of your personal insurance.
Contact: Rebecca Korach Woan, 312.645.1200, firstname.lastname@example.org