Construction Insurance

Construction insurance is a little different than liability insurance. It is sometimes called a “builders risk” policy.

The main difference between contractors liability insurance and construction insurance is that liability insurance protects the contractor from accidents, and construction insurance protects the structure during the building process. In other words, it protects the materials purchased for the structure during the building process, from loss due to damage or theft.

While it is usually the home buyer who is responsible for getting construction insurance to protect their investment, the general contractor constructing the building may buy it if it is required in the contract. Depending on the area the building is being constructed, this insurance may also be necessary to comply with local city, county and state building codes.

Sure, if a contractor causes damage to a home under construction, this damage would be covered under their liability policy, but remember, they are only liable if the contractor or his workers were negligent and caused the damage.

Damage could come from many sources including fire, wind, storms, ice, etc. This certainly would not be the fault of the contractor. So to avoid losses in this situation, it is wise for the person having the home built, to take out a construction insurance policy. In fact, construction insurance will usually protect you from losses due to fire, vandalism, lightning, wind, and similar forces. However it probably will not cover you if there is a flood, an act of war, or an earthquake.

Coverage typically ends when the construction period is complete at which point your homeowners policy would take over.

Oh, and beware… if you’re one of those hands-on folks who likes to pop in on the builder constantly, and do work on the home during the building phase, you may want to refrain from that. That’s because any damage you do to the structure during the contractors building phase will likely not be covered under any policy, including the contractors liability insurance or your construction insurance.

My best advice is to stay away during the building phase. I’m not saying you can’t pop in and check in on THEIR progress, of course you’re going to want to do that. But do yourself a favor and keep your toolbelt at home. Otherwise you’ll be tempted to turn a screw here and drive a nail there. The next think you know you’ll be plugging in power tools. Just don’t do it. You hire THEM to do the job, so let them do it.

One exception you should know about is this… If the construction project primarily exists of renovations or additions to an existing building, the owner’s existing property insurance may cover the work. So check with your insurance provider before buying construction insurance. THe last thing you want to do is pay for an insurance policy you may not need.

Construction insurance will cover only the amount spent on the structure up to the point of the damage. In other words, if your home will be worth $300,000 when it is complete, but you have only spent $100,000 in the building process up until it is destroyed by a lightning strike and fire, you’ll get $100,000 from the policy.