The bank is requiring us to secure a homeowner’s insurance policy before closing. The insurance companies will not insure the house under a traditional homeowner’s insurance policy because we will close and immediately begin construction. We will not move in until the construction is finished because we have children and we don’t want to live in a construction zone. This seems like a catch 22. Please help this first time homebuyer and first time renovator what I need to do.
Do I Need Builders Risk Insurance To Purchase A Home Where We will Do Major Renovations Before Moving In?
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You should also control the insurance and you should not insure the builder in that process. The primary issue here is one of what we refer to as "insurable interest". Quite simply, you have the most to lose in a loss of the home and as a consequence you need to buy insurance to protect both your property interest and provide the lender with protection for the collateral (your dwelling) used in the loan. The building or contractor may have an interest in installed materials up to the point they make a draw for the installations, but their interest ends at that point because they don't have an ownership position in the home. They can purchase "installation" coverage in their insurance package that will protect them for the value of their work installed and it is not expensive coverage so they should have this already. Do not agree to assume responsibility for their liability either. If it is their construction site, it is their responsibility to maintain as best as possible to minimize the potential liability exposures. That said, you should make sure to purchase and maintain personal liability for the property too for any potential risk of loss that would be excluded by the building in the site management. Alternately, some carriers will amend current policies to add the new address for liability and then you wouldn't need to have this coverage added to your builders risk coverage.
By the way, the dwelling policy form permits (in many instances) the addition of endorsements that provide coverage for the value of material delivery to the site that you might have purchased. These building materials are subject to theft and it is a good idea to know if the builder or you are responsible for materials delivered to the site. Also, a dwelling policy should be created to the new total value of the improvements and original structure on either a replacement cost or actual cash value basis. I suggest replacement cost. Insurance to value is important even on this type of policy. Carriers using the dwelling form of coverage will pro-rate valuation to an average state of completion for premium calculation, but valuation at the time of loss is also tricky so keep good records so you can rebuild the entire structure after a major loss.
Cleaning up the concepts here also makes it necessary to make sure that the contractor has general liability and workers compensation insurance. If they have vehicles that operate on the property you should also insist that they provide evidence of vehicle insurance. In every instance above, you should be listed as an "additional insured" and "certificate holder" during the performance of the construction tasks. If possible, ask them to waive subrogation. Get evidence in writing. A commonly used form is the "Acord 25" Certification of Liability Insurance form and this is commonly provided ask for and get written evidence of coverage as noted above.