A few weeks ago, a builder called to get a general liability quote. I asked when his current policy expires. He replied, “oh, I let that policy go a few months ago when my last project was finished.” Are you no longer in business? I asked. “Sure,” he said, “I just don’t need insurance since I’m not building right now.”

I was beginning to feel a little uncomfortable. Did you sell your last house then? was my next question. “No,” he innocently replied. Are you trying to sell it? I asked. “Of course, I’ve got open houses every weekend. I had maybe two dozen people walk through just last Sunday,” he said with pride.

As our conversation continued, it slowly emerged that this builder simply didn’t think he had any responsibility to the public during his weekend open house tours. Not only that, but he had also recently gone back to an earlier home buyer to finish a downstairs family room. Yet another past customer had asked about adding a Florida room. Our builder gave an estimate and was waiting to hear back. He admitted he’d “probably” need general liability insurance then to do these small projects, but it was clear he didn’t really see the risks involved. Whether this was due to a desire to control costs, an over-reliance on his subcontractors, or just a lack of understanding as to how general liability insurance works, is hard to say. To this builder’s credit, he allowed me the time to walk through the liability risk potential of each scenario we discussed.*

First, the weekend open house tours: Until it is sold, the home, finished or not, is the property of the builder and he is liable for bodily injury to any member of the public who sets foot on any part of the property and is injured. This is true whether they are there as invited guests between 1:00 and 4:00 each weekend, or if they stop by unannounced after work on a Tuesday. In fact, if anyone who is not working for the builder gets hurt while on the property, they have a right to file a liability claim and a lawsuit against the builder. Without general liability insurance, the builder is on his own.

Next, finishing the family room: The subcontractor hired to do this small job has his own general liability insurance and the builder has a certificate proving it, issued when the policy renewed about four months ago. Unfortunately, the sub’s policy was recently cancelled for non-payment of premium. While at the home, the subcontractor carelessly drops a cigarette butt that starts a fire causing over $100,000 in damage to the home. The smoke, heat and water damage sustained by the home next door when the fire department put out the blaze isn’t covered either. That’s worth another $215,000. All this damage would have been insured in addition to the cost to defend the builder in the resulting lawsuits, had our builder not canceled his general liability policy when he finished construction.

Last, but not least, the Florida room: The subcontractor has active general liability insurance. Nothing happens during the project. Everyone’s happy. Then, about a year later, during an unusually cold winter, the homeowner starts his gas fireplace for the first time in ages. The fireplace is in the living room that adjoins the new Florida room. Not long after flipping the switch, there is a terrible explosion. The house is a total loss. It seems the subcontractor had nicked a gas line with a drill during installation of the prefab Florida room. With such a catastrophic loss, the subcontractor’s policy limit is quickly used up. Our builder’s policy would have provided excess limits because the builder is liable for hiring the subcontractor who nicked the gas line. Since our builder doesn’t have $1,000,000 laying around, he’d lose his business in this scenario.

So, what are the odds of any of those things actually happening? It's anybody's guess. You see, insurance is based on the law of large numbers. If you toss a coin enough times it will come up heads half the time. If you toss it only a few times, there’s little chance of predicting heads or tails. Are you feeling lucky?

*These are only a very few of the potential risks associated with general liability and are intended merely to illustrate the potential for uninsured losses.

Good news -- we gotcha covered! Contact us today for more info on GL, Builders Risk, or Contractor's Equipment Insurance. The RWC Insurance Advantage (RIA) program is offered exclusively to our builder members. Because of that, we are able to avoid the high risks associated with other commercial operations. Thus, we keep the cost of claims low and pass the savings on to you. More info / questions: 866-454-2156 or info@rwcinsuranceadvantage.com.

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By Doug Davis, RWC Insurance Advantage

As a leader in the residential home building industry, RWC Insurance Advantage is committed to providing general liability insurance and select other coverages to members of RWC. Below are some commonly asked questions:

 What is an additional insured?

An Additional Insured is a person or organization that, like you, enjoys the benefits of being an insured under your policy. An additional insured cannot make changes to your policy.

Why should I be an additional insured on my subcontractors’ policies?

When you require your subcontractors to list you as an Additional Insured on their General Liability policies, you become entitled to insurance coverage benefits under their policies. Additional Insured status is most often used in connection with an indemnification agreement, also known as a hold-harmless clause. Hold harmless clauses are common elements of a properly executed contract between you and your subcontractors. Under a hold-harmless, your subcontractors agree not to hold you responsible for their negligent acts which may have happened while they are working for you. For example, if your painter over-sprays several cars parked near the three-story townhouse you are building, the painter’s policy will respond to the claims made by the owners of the cars. If you are brought into a lawsuit filed by the car owners, the painter’s insurance company will defend you.

What if my subcontractor doesn’t have insurance? 

If your subcontractor doesn’t have his or her own General Liability, you can be held liable for claims made against the subcontractor. This is because the General Contractor is considered to be in charge of the worksite, and therefore, is responsible for the safety of the public at that site. Beware of policies sold by some insurance companies that exclude claims arising out of the work performed for you by subcontractors.