New home construction insurance certainly isn’t a glamorous topic, but if you are considering a custom home, you better have this base covered. Most folks in the construction industry will tell you that it is not if, but when you hit that bump in the road. If that bump happens to be related to theft, fire or an injury on the job site, you’ll be glad you spent time thinking about this topic and making sure you’re covered. Here's what we will cover in this article:
Different Types of New Construction Insurance
We are all familiar with insurance for our families. We have home insurance, car insurance, health insurance, life insurance and the list goes on and on. What type of home construction insurance should you have? Here are the various types of insurance that you may need to learn for your custom home – General Liability, Professional Liability, Workers Compensation, Builders Risk, and Flood Insurance. You may already be familiar with these, but let’s provide information on each.
Builders Risk Insurance
This specialized insurance covers the home during construction for a wide range of perils including Theft, Vandalism, Fire, Lighting, Hail, Wind, Explosions, etc. It is specifically designed for unfinished home builds, so its job is complete when the house is complete. Once it is completed, you will need to transition to a traditional homeowner’s insurance policy, which can protect both the structure and the contents of your home. The coverage amount should be determined based on the total cost to build the home. Most often the builder will obtain this insurance and include it in their total cost, but occasionally the homeowner does obtain this insurance. Assuming a lender is providing construction financing, they will require this coverage and need proof it is effective starting with the loan closing in the full amount of the construction cost. Depending on the expected timeframe for construction, a 12-month policy may not be adequate so work with your agent for longer durations.
Flood Insurance
This insurance quite simply covers the home structure due to damage caused by flooding. Not all properties are in waterfront or flood locations which require flood insurance. If flood insurance is required, just like Builders Risk, the lender will require this to be effective at closing. While builders can obtain Builders Risk insurance, Flood Insurance is more difficult for the non-owner of a property. For this reason, if flood insurance is required, it is typically obtained and paid for by the homeowner.
General Liability Insurance
This insurance is the responsibility of the builder to maintain. Typically states require this insurance for a builder to be licensed. This covers the contractor if the work leads to bodily injury or property damage. So should there be any damage to the home while under construction, this covers for that. Again, this insurance will be obtained by the builder and is their responsibility to share Certificates of Insurance with lenders and any other parties.
Professional Liability Insurance
This coverage is obtained by design professionals like Architects and Engineers. It covers negligence, copyright infringement, personal injury and more. It can cover damages due to errors or mistakes in the plans if items should or should not have been included.
Workers Compensation
This coverage is obtained by the builder and all the subcontractors that work on the project. Under this coverage, workers are covered for occupational injuries, regardless of fault. It is a requirement for all employers.
What Insurance Do You Need
Will all these different insurance types, what do you need to have for new home construction? Well, all of them really. Whether you are acting as your own contractor or have contracted with a builder, you should have all of these. The only exception is Flood Insurance if the property is not in a flood zone that requires it. This may seem like you are well over insured, but each has a specific reason and coverage. As many accidents and other issues that can happen on a construction site, we would recommend these are all very solid investments.
Additional Resources
Builders Risk - This article provides additional details on BR insurance coverage and polices
FEMA - Flood insurance details from FEMA
General Liability vs Builders Risk - This article points out the differences and explains why both are critical to have
Why Pays - This article discusses whether you or the builder should pay for the insurance coverage