There are three types of insurance lenders typically require for construction loans; Builder’s Risk / Course of Construction, General or Personal Liability, and Worker’s Comp.
Builder’s Risk / Course of Construction Insurance
Builder’s Risk and Course of Construction Insurance are essentially the same thing just named differently by insurance companies. The Builder’s Risk, or Course of Construction, Policy protects the project itself from direct damage. Almost anything that can damage the project is covered. Typical policies cover fire, lightning, windstorm, hail, vandalism, and malicious mischief. The so called “named perils” form limits the types of damage covered by the policy. This section should be checked closely by the owner builder to ensure they are comfortable with the perils covered. Again talk with your insurance agent.
A broader form of coverage is available, yet not necessary for minimum loan requirements, called an “all risk” form. Basically it protects from every risk except those spelled out as exclusions.
Lenders require the Builder’s Risk policy cover the loan amount or the cost to build new figure found on the subject to appraisal (located on page two of the appraisal in the upper left hand cost approach box).
Workers’ Compensation Insurance
As long as a suitable workers’ compensation policy is in effect, the law states that injured workers may recover fixed insurance benefits but may not sue their employers. In some instances owner builders are considered employers so knowing who is responsible for the worker on-site is very important.
In the case of sub-contractors providing workers for a project, they should already have a Workers’ Comp policy, and the owner builder should not allow any work to be performed without proof of this insurance. Owner builders should be keenly interested in their sub-contractors’ Workers’ Compensation Insurance, because workers generally cannot sue project owners for their injuries if recovery is available under their employer’s insurance.
Workers’ Compensation Insurance is a commercial policy and can be expensive. Knowing this, some lenders allow leniency pertaining to this policy by having the owner builder sign waivers stating they will ensure all workers on the project are covered. This means the owner builder is responsible for checking all sub-contractor’s insurance policies for Workers’ Compensation coverage.
General Liability and Personal Liability
Owner builders are legally responsible for conduct and damages on the jobsite and can be sued for negligence. General contractors solve this problem through their General Liability Policy. Since this policy is a commercial policy it can be very expensive for the owner builder.
Some lenders allow a Personal Liability Policy in lieu of a General Liability Policy for minimum insurance requirements. Typically seen in home owner insurance policies, Personal Liability covers against a claim or lawsuit resulting from bodily injury or property damage to others caused by an accident on your property. $300,000 per incident is the normal minimum requirement.
