General Liability Insurance for home builders: Are you protected?

AuthorUmbrella house rained by: Insurance Specialty Group

Many builders would be surprised to know what their general liability (GL) insurance does and does not cover. They figure, “I have (or I pay a lot for) insurance—I should be covered for everything.” However, it’s important to understand the nuances that come with a GL policy so you, or your business, doesn’t get caught in a negative financial situation. Here are a few situational examples to give you a better idea:

#1: Switching insurance policies/carriers

As a home builder, you decide to switch insurance carriers because you found a company that offers better rates. You built several houses while you were covered under your previous insurance carrier. Many carriers however, exclude prior completed homes when they first write a new account. When switching policies, talk with your insurance agent about options for including your previous projects on the new policy*.

#2 Exclusions

Does your policy include coverage for work performed on your behalf by a subcontractor? If a subcontractor causes damage you may or may not be financially responsible to the homeowner and you may or may not have coverage for that exposure.  To protect yourself, make sure your general liability insurance does not include endorsements that limit coverage for work performed on your behalf by a subcontractor**.

#3 Defense inside/outside limits

Did you know that the majority of construction defect liability claim payments go towards attorney fees with a policy that includes a “defense inside the limits” provision? By having this provision, the policy’s applicable limit of insurance is dramatically reduced because legal fees are paid within the policy limits. Ask your insurance agent if you have this provision and what you can do to mitigate the potential consequences***.

*Exclusion – Property Damage To Prior Completed Operations eliminates all property damage lawsuits arising out of construction jobs that were completed and accepted by the owner or purchased prior to the start of the policy period. Property damage could be to the house itself, its contents or to a neighboring house

**Although not all jurisdictions have addressed the issue, the majority of those that have found that the insured general contractor or developer’s CGL policies cover faulty completed subcontractor work. In response, insurers are adding endorsements to the policies that eliminate the subcontractor exception. Given the concerns prompting the creation of the broad form property damage endorsement, judicial interpretation of the policy language, and usage of the endorsement eliminating the subcontractor exception, the issue of whether the general contractor’s CGL policy covers faulty completed subcontractor work is far from settled.

***When you incorporate proper risk management requirements and a structural home warranty the majority of claims payments go to damages versus defense costs. Location of the builder and admitted versus non-admitted insurance programs typically impact the ability to get defense inside or outside the limits.             </>

NOTE: This is for general information purposes only and is not advice regarding a particular insurance product.  2-10 HBW is not an insurance company or an insurance broker, and this is not an offer or a solicitation to purchase insurance.       

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