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Building a Home? You'll Need to Know Your Insurance Requirements

Jun 27, 2008
When you are building a new home, you will need insurance to protect yourself while the home is under construction. If you are hiring a licensed general contractor, he will most likely have some insurance in place to cover the bulk of the requirements. However, if you are going to be an owner builder and oversee the construction yourself, you will need to get insurance coverage to protect the home and yourself.

Owner Builders have their own unique set of insurance requirements. You will typically need to obtain a "Builder's Risk" policy. If you hire a general contractor to build your home, he would have the insurance. In this case, you would not even have to think about it. But, since an owner builder acts as his own GC, you must be aware of the need for a Builder's Risk policy.

A builder's risk policy provides protection to the property as it is being built. This usually includes protection against theft and damage (natural or man-made) during construction. Once construction is finished, you will obtain a standard homeowner's policy.

For owner builders, the Builder's Risk policy (also known as Course of Construction) should be large enough to cover the replacement costs, or replacement value of the structure itself. For example, if you are building a home that will be worth $300,000, then a portion of the value is in the land. If the land is worth $100,000, then you want to make sure your Builder's Risk policy has a coverage of at least $200,000 to protect the structure (minus the land).

It is important for owner builders to shop for the right kind of builder's risk policy. Many insurance agents will try to sell you a commercial builder's risk policy - either by mistake or because that is all they are aware exists. You will know you are getting a commercial policy when you see one thing - the price tag. Commercial policies cost several thousand dollars, so it will jump right out at you.

By contrast, a personal policy should cost a few hundred to no more than a thousand dollars in most cases. And it will never cost more than about two thousand dollars.

For owner builders, the costs of the insurance policy will vary based on the coverage amount, the property's distance from a fire station, distance from fire hydrants, the flood zone classification, etc.

Often you can find a homeowner's policy that has a "course of construction" clause built into it. This is probably the best and most affordable way for owner builders to get a builder's risk policy.

It is also nice because once you are finished building, it automatically becomes your homeowner's policy. Be sure to tell your agent you want a homeowner's policy that includes a course of construction clause or "rider" first.

Then, ask for a builder's risk policy if the homeowner's policy is not available. If one agent tells you he cannot provide either of these, call other agents. These policies are out there in all 50 states.

They are just not as well-known, even to the agents who sell them. Even agents who work for companies that offer these policies often do not know they are available. Shop around and ask your loan professional for a referral if you need.

As a side note, whether you are using a general contractor or building as an owner-builder, you may want to consider purchasing a liability insurance policy. Whereas builder's risk protects against damage to the structure, a liability policy will protect you, the owner of the property.

Imagine a kid sneaks onto your land to play in the half-built house at night. If that kid gets injured, your liability policy will help protect you from any legal claims against you.

If you are hiring a builder, the builder should already have liability coverage, but you will want to double check to make sure you understand what your liabilities are as the owner of the land. Then, you may still want to consider purchasing your own liability coverage.

Owner builders will definitely want to consider purchasing their own coverage. Most owner builder construction loans won't require liability insurance to close the loan. Most lenders simply want to see that you have the builder's risk policy.

However, as an owner builder, you should consider protecting yourself through the liability insurance. And, of course, protect your property with a comprehensive builder's risk policy.

Do not actually buy your insurance policy until you have consulted with a construction loan professional. Don't assume you are saving yourself time by buy the policy now, as it may be the wrong policy for the loan.

Check with your loan professional and even let them speak to your insurance agent to arrange for the right policy. Any good loan professional should do this for you.
About the Author
Chris Esposito provides owner-builder construction financing nationwide through his Owner Builder 101 program. Visit www.OwnerBuilder101.com to get all the information you need to be a successful owner-builder, saving tens of thousands on your next home. Or call Owner Builder 101 at (877) 876-3688.
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