By Dan Corbin, CPCU, CIC, LUTC

Does everybody know what time it is? It's time for your clients to start a home improvement project or maybe a new construction project. And who do you want your clients to have on the job? Certainly not Tim "The Toolman" Taylor. Al, maybe, if he leaves Tim back at the Tool Time set. Even if Jill or Heidi did the job, everyone would, at least, be much safer.

Contractor screening
For those who don't intend to do their own work, hiring the right contractor is of utmost importance. The Internet is a great place to begin the process. One site I found to be very useful is www.b4ubuild.com; it's full of excellent resources, including a guide on how to qualify a contractor. Next you will want to visit the site of your local building department. Often on these sites, there is valuable information about permits and contractor licensing requirements, as well as helpful tips. Local building associations also may offer some useful information.

A visit to the building department (or phone call) will allow you and your clients the opportunity to ask specific questions. If a permit is required for the home improvement or new construction project, make sure your client knows who is assuming the responsibility to obtain it (should be addressed in the builder's contract). Remember, your client is ultimately going to suffer if the building permit has not been obtained and local codes have not been complied with. Inspections made after the work has been completed can be costly because the inspector may have to deconstruct the home to view the work of plumbers and electricians.

Surprisingly, there is no state requirement to license or register a home improvement contractor in New Hampshire and New York, but there is a requirement for contractor registration in Connecticut (verify registration at http://www.ct.gov/dcp/cwp/view.asp?a=1625&q=274440) and New Jersey (verify registration at http://www.state.nj.us/cgi-bin/consumeraffairs/search/searchentry.pl). Typically, though, electrical contractors and plumbing contractors are required to be licensed (not New York). Two useful Internet sites for locating state licensing requirements can be found at www.contractorreferral.com or www.permitplace.com.

Property insurance
If your client is planning a project that will increase property values, there will be the need to adjust property insurance limits. Renovations and additions necessitate establishing a new replacement cost limit for Coverage A—Dwelling. A new or improved “other structure” on the premises will likewise require an appropriate limit for Coverage B—Other Structures; keeping in mind the limit restriction of 10 percent of Coverage A, unless increased by endorsement.

Don't forget to ask how the other structure is being used. Business use or rental use (other than as a private garage) will void coverage on the structure, regardless of the limit applicable to Coverage B. Depending on the circumstances, an endorsement or a separate policy may be required.

If a new home is being constructed, there will be a need to write a new policy. The construction contract should address the issue of who is responsible for insuring the dwelling under construction. Since your client likely holds the deed to the real estate, your client may be the one to obtain the property insurance. If your client assumes that responsibility, then he must choose between a personal lines dwelling policy, a homeowners policy or an inland marine builders risk policy.

Dwelling policy. An Insurance Services Office Inc. dwelling policy endorsed with the Dwelling Under Construction (DP 11 43) form will provide basic coverage. Because the property at risk during the course of construction gradually reaches the completed value over a period of months, the policy is reasonably priced 35 percent below the owner-occupied Coverage A—Dwelling rate for the projected value upon completion. The insured must notify the insurer within 30 days of occupancy in order to preserve coverage on the dwelling. Typically, then, the policy would be canceled and rewritten in the homeowners program.

Although the contractor can be named as an additional insured on the dwelling policy, the contractor will not be covered for property located off the premises. Should the contractor need coverage off the premises, the contractor or subcontractors may need to purchase installation risk policies (or the entire project could be insured on a builders' risk policy). And, even though the ISO dwelling program includes the option to add a Broad Theft Coverage (DP 04 72) endorsement, its wording would preclude coverage for the theft of construction materials.

Homeowners policy. The homeowners policy is priced higher than a dwelling policy, but it has the advantage of simplicity, as there will be no need to change policies when the project is completed and the client occupies the new home. Like the dwelling policy, the contractor can be named as an additional insured for property on the premises and there is no provision in the ISO homeowners program for covering the theft of construction materials. Some insurers do offer a construction endorsement that reduces the premium for a limited period of time while the dwelling is under construction.

Builders' risk policy. Ideally, a dwelling under construction should be insured with an inland marine builders' risk policy, whether purchased by the contractor or your client (the contractor may be able to negotiate better terms). A builders' risk policy has the potential of providing more comprehensive coverage, which might include the theft of construction materials, fewer exclusions, off-premises coverage (e.g., in transit), protection for soft costs and the ability to name multiple interests (e.g., subcontractors).

Personal liability insurance
Section II—Liability Coverages found in the various ISO homeowners policies will protect your clients against suits involving renovations, additions and new construction, whether work is preformed by a contractor or by the client. One issue that may need to be addressed is the amount of limits that are appropriate for this added exposure. This is particularly true in New York, where the owner who is acting as general contractor can be held liable for injuries to workers under Section 240, 241 and 241-a of the Labor Law.

Consider, also, the professional liability exclusion in the homeowners policy. Suppose your client is an architect who draws up the plans for his home, then hires a contractor to build it. Liability for design flaws will not be covered. However, suits that involve negligent hiring of the contractor would be covered, along with liability for unsafe premises. There is even contractual coverage in the policy should your client assume another party's liability for bodily injury or property damage.

If your client's new home is being built at a location away from the current residence, there is a need for premises coverage at that location. In the ISO homeowners policy, land designated for the building of a one- or two-family dwelling is an "insured location" as defined in the policy and will automatically be covered if there is a policy in force at the current residence (even if only a renters policy).

Commercial general liability insurance
One way to help ensure your client isn't dragged into a lawsuit over the contractor's work is to verify, by means of a certificate of insurance, that the contractor has commercial general liability insurance. If your client is acting as the general contractor, certificates should be obtained from every subcontractor.

Plaintiffs are less likely to search for creative legal theories to bring in the owner when the contractor is insured. In fact, when your client is building a new home or performing extensive work on an existing home, you may want to advise your client to be named as an insured on the contractor's policy.

And, if your client becomes the plaintiff, the contractor's insurance will provide a remedy for injuries to family members, damage to property caused by the contractor (but not damage to property being worked on) and damage to property caused by the contractor's work (but not damage to the contractor's work).

Beyond third-party liability, the contractor's insurance will provide a remedy for injuries to your client's family and damage to your client's property caused by the contractor.

Workers' compensation insurance
It is in everyone's best interest to be certain all workers on the job are covered with workers' compensation insurance. When your client hires a contractor, a certificate of workers' compensation should be requested. And if your client is acting as the general contractor, certificates should be obtained from every subcontractor. In fact, some states (for example, New Hampshire) may hold a homeowner acting as the general contractor contingently liable for uninsured subcontractors. Consequently, it will be necessary for the homeowner to purchase a workers' compensation policy in these states, despite the fact the homeowner has hired no employees.

In addition, if there is even a remote possibility your client will hire a worker that could be considered an employee of the client and eligible for benefits under the Workers' Compensation Law, a policy should be purchased. Nevertheless, New York and Connecticut have very specific statutory workers' compensation requirements when applying for a building permit.

New York. According to state law, someone who obtains a building permit, whether the contractor or the homeowner, will be required to show evidence of workers' compensation before a permit will be issued. The person who applies for the permit must provide the local building official with a certificate of insurance indicating that a workers' compensation policy and a disability policy are in force covering all employees working at the site, or prove eligibility for an exemption.

For homeowners who intend to act as the general contractor, an exemption will be granted if the prescribed BP-1 form is filed with the building official when applying for a permit. The BP-1 form is only acceptable if the homeowner will either be: 1) doing all the work without help, or 2) hiring workers for less than 40 hours per week (aggregate for all workers) while maintaining a New York homeowners policy (which automatically covers any workers' compensation obligation imposed for this limited employment). Otherwise, either the homeowner or the homeowner's contractor will need to provide proof of insurance (by filing the C-105.2 or U-26.3 form) or provide proof of exempted status (Certificate of Attestation of Exemption CE-200 form).

[The forms referenced above may be obtained at http://www.wcb.state.ny.us/content/main/Forms.jsp.]

Connecticut. According to state law, someone who obtains a building permit, whether the contractor or the homeowner, will be required to show evidence of workers' compensation insurance before a permit will be issued. The person who applies for the permit must provide the local building official with a certificate of insurance indicating a workers' compensation policy is in force covering all employees working at the site, or prove eligibility for an exemption.

Only sole proprietors or property owners are exempt, provided they will not be acting as a general contractor or a principal employer. To prove this exemption, the applicant will need to file the Workers' Compensation Commission Form 7A. Otherwise, the sole proprietor or property owner will need to file Form 7B, verifying that coverage will be maintained for workers at this job site.

[The forms referenced above and their instructions for completion may be obtained at http://wcc.state.ct.us/download/forms.htm.]

Prudence
I understand that rescuing home improvement do-it-yourselfers has become a growing industry. If your client doesn't want to end up with a Tim "The Toolman" Taylor project, close attention should be given to whether your client possesses the knowledge and skills to complete the work safely. Not every botched job can be fixed with duct tape. 12/09