Insurance Considerations

The cost of insurance is a calculated as percentage of the cost of construction. You’ll want to know the costs, to inform your budget.

Talk with your building department and insurance provider to completely understand the requirements in your state.

if the project value exceeds the required coverage, you can always ask to increase the limits.

There are four insurance options to consider:

No Insurance

Without insurance, you have no financial protection if the contractor (the employee) sues the you (the employer).

The employee often has up to two years to file suit, in the event of an accident, although they must prove the owner was negligent to win. If the employee wins, they can be entitled to recover medical and out of pocket expenses, lost wages, pain, and suffering.

If you’re considering this route, reduce your liabilities by having your contractor sign a Hold Harmless statement.

Such a waiver can help provide you with protection from liabilities resulting from any injuries that befall the contractor during their work. We highly recommend having an attorney familiar with the laws of your state review any Hold Harmless statement to ensure that it is legally defensible in your state.

The safest course of action is to make sure you purchase builder’s risk insurance and have the contractors carry general liability and workmen’s compensation, as follows.

Builder’s Risk Insurance

This type of property insurance covers damage to a building while they are under construction. It protects the owner’s and contractor’s insurable interests in materials, fixtures, and equipment used for the construction or renovation of a building or structure against physical loss or damage from covered causes. The owner or the contractor purchases the insurance and the average premium generally ranges from 0.25% to 0.65% of the cost of construction, depending on the project size and location. We’ll discuss how to add this cost in your budget in Planning – Project Budget.

The parties with insurable interests often include:

Some catastrophes typically covered by builder’s risk insurance include:

Builder’s risk insurance coverage can vary from provider to provider, so it is important to know what your builder’s policy covers.

General Liability

General liability insurance protects contractors, against third party claims and/or lawsuits alleging injuries or property damage suffered on site. A third party is someone not directly connected with the work and with no affiliation to the owner or contractor(s). The average premium can range from 0.24% to 0.62% of the cost of construction, depending on varying factors such as, but not limited to project location, type of work, contractor experience, and revenues. We’ll discuss how to add this cost in your budget in Planning – Project Budget.

Some of the catastrophes typically covered by general liability insurance include:

Workman’s (or Worker’s) Compensation

Workman’s compensation insurance covers employee injuries on the job. The State Department of Insurance regulates it, so it’s generally standard across the United States. The contractor pays for it. While laws are constantly changing, as of 2021, Texas is the only state that does not currently require worker’s compensation insurance.

Insurance companies generally charge contractors for workmen’s compensation based on factors such as, but not limited to, the trade type, company’s total yearly revenues, and years of experience. The average premium can range from about 6.6% to over 36% the cost of labor, depending on the trade. We’ll discuss how to add this cost in your budget in Planning – Project Budget.

The insurable interest is the employee’s physical body. Some of the injuries typically covered by workmen’s compensation insurance include:

TIP: Understand your potential exposure; talk with your insurance representative and your loan officer to make sure that you have the right coverage.