Renovating Your Home? Protect Yourself Against Liability
A home renovation can be a stressful but exciting and rewarding project. But it's also a time of increased peril, from a homeowners' perspective. Any time you open your home to strange people to tear things apart and engage in hazardous activities using ladders, scaffolding, flammable materials and power tools, with tens of thousands of dollars on the line, you have all the basic building blocks in place for something to go terribly awry.
Some examples of possible hazards:
- Uninsured property loss or theft
- Criminal activity on the premises by a contractor or employees
- Workplace injury or death
- Faked workplace injuries
- Abandonment of projects mid-stride by contractors experiencing financial or personal difficulties
- Fires, flooding or weather-related damage while your home's structure is compromised by construction
This is why we should be involved in the building or renovation project from the very beginning. We can help you identify a wide variety of significant - even life-changing - risks, and help you protect yourself and your family for a very small cost compared to the protection received.
Check the Basics
The first step in the process is to check on your existing insurance coverage. Unfortunately, many families are severely underinsured. According to a survey commissioned by ACE - an insurance carrier that specializes in the protection needs of high-net-worth families, 40 percent of families with $5 million or more in investable assets had less than that figure in umbrella liability coverage. One high-net-worth family in five responding actually had no umbrella liability coverage. At the same time, actual claims history from jury verdicts and out-of-court settlements can rise to $10 million per case and even more.
A smart homeowner embarking on a major project will inspect contractors' coverage and make sure they have adequate coverage in place themselves. We can help guide you through this process, which is a vital part of due diligence on contractors. The idea is for you as the homeowner to know that the contractor has so much coverage in place that anything that goes wrong will be their problem to solve - not yours - and that they have the wherewithal, expertise, financial stability and insurance protection to solve it.
11 Mistakes People Make When Renovating Property
Major home renovation projects and construction projects are complex endeavors with a lot of moving parts. The more complex the endeavor, the more that can go wrong. Here are some of the major mistakes people make that put their hard-earned wealth at risk.
- Insufficient umbrella liability coverage. Generally, your protection in place should equal your current net worth plus the net present value of expected future income. At a minimum, you should have enough to protect your investable net worth because that's precisely what trial lawyers will be gunning for, in the event of a lawsuit.
- Attempting to act as their own general contractor. Contracting is complex, and requires a full-time understanding of the process, rules and regulations. Plus, a good general contractor will come with their own insurance against a variety of mishaps-insurance coverage that protects you.
- Failure to insist on background screening of all workers. Most construction workers are honest and hardworking tradesmen. But in some studies, we find as much as 30 percent of contractors, subcontractors and employees working a given home renovation job site are convicted felons.
- Failure to ensure workers compensation insurance is in place for all contractors, subcontractors or employees. If someone is injured and there is no workers compensation coverage in place, the worker's lawyers will be coming after you.
- Failure to conduct due diligence on contractors. Does the contractor actually have the skill sets, financial stability and leadership/management in place to complete the project within the estimated cost range and on time? Do they have a track record of success? Have they had trouble paying their bills, workers and invoices? Does the management have a good reputation for integrity?
- Failure to check licenses and bonds. Legitimate general contractors are very careful to use only licensed subcontractors. Some insurance policies may not cover events that arise because of actions by unlicensed contractors and their employees.
- Insufficient insurance coverage. This isn't just at the homeowners' level. It starts with the contractor himself.
- Failure to inspect specific language of contractors' insurance policies. The language you want is something that establishes the contractors' insurance as the primary insurance, with your insurance as secondary. You also want language that waives the contractors' insurance carrier's right to subrogate claims against your policy. Overall coverage amounts for your contractor's general liability policy should at least cover the value not only of your home, but also its contents. Total amount of coverage is key.
- Failure to establish a bond protecting you against the possibility that the contractor will fail to finish the job. If the contractor fails to perform, the bond company pays you a set sum you can use to finish the job. Contractor failure can happen for a variety of reasons beyond the contractor's control. It will add a few percentage points to the cost, but it will potentially protect you against many thousands of dollars in damages.
- Failure to protect oneself against a contractor's failure to pay subcontractors. When this occurs, a subcontractor could put a lien on your house. If you've already paid the general contractor, you'll have to pay the unpaid subcontractors twice to release the lien. To prevent this, you can require the general contractor to post a payment bond guaranteeing payments to subcontractors.
- Failure to buy Builders' Risk insurance, or add endorsements to homeowner's' policies. Your homeowner's policy will usually have some general liability insurance, but generally not more than $500,000. This is not usually sufficient general liability coverage to protect you. Your standard home insurance policy is designed and priced to provide protection when you are simply living in your home. They are not designed to cover you when you have the place torn up and strange people crawling all over your property using hazardous implements. To protect yourself, call me about adding temporary riders or builders risk endorsements.
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