Most contractors know that if they fail to carry general
liability or worker's compensation insurance, they are just one
lawsuit or accident away from being broke and out of business.
Far fewer seem to realize that it is equally risky to remodel
homes that are inadequately insured by the owner. The vast
majority of remodeling projects are completed with no loss of
property, but when there is a loss, the problems can be
For example, let's say the Smiths own a home that is worth
$500,000 and is insured for that amount. They hire a contractor
to remodel the home for $250,000. If the project work is nearly
complete and a fire destroys most of the home, the Smiths may
not have enough money — even with the insurance
settlement — to repair the house or redo the remodeling
work. There also may not be enough money to pay the contractor
for work that's already done or for the materials that were on
site but destroyed before being installed.
How Protected Are You?
A general liability policy will not cover the contractor for
this claim. Most standard construction contracts make the owner
responsible for all materials as soon as they are delivered to
the site. It's a good idea to make sure that your contract
spells this out, too.
Just because the customer has a homeowner's
policy doesn't mean it's large enough to protect both
of you. If the homeowner does collect on the policy,
there's no guarantee he will use the money to pay
Make Sure You Can Collect
The place to start is with your contract — and I'd advise
you to discuss this with a lawyer. Your contract should make it
clear that the homeowner is financially responsible for
building materials as soon as they arrive on site. It should
also state that the owner owes you for the amount of work,
including profit and overhead, that has been completed to
Make sure the client discusses this with an insurance agent and
increases the value of the policy to reflect the value of the
home once the work is complete. You may be legally entitled to
payment, but you will have a hard time collecting if the
property was underinsured.
If the coverage falls short, don't expect the courts to resolve
the issue in a way that is necessarily fair to you. It has been
my experience that the courts will normally allow the
underinsured homeowner to rebuild the house, and only then, if
there is money left, will the homeowner have to pay the
contractor what is due him.
Become a loss payee. On large
projects where you have a lot at risk, you may want to include
a clause in your contract that requires the client to name you
as a "loss payee" on the homeowner's policy. If you are listed
as a loss payee and there is a claim, your name will appear on
the check from the insurance company. The owner will need your
signature to cash it. This prevents the owner from cashing the
check and spending the money on whatever he wants.
Some of my clients have actually gone to the bank with the
owner to make sure they got their share of the check. In some
cases — although it's rare — the insurance company
will adjust losses with each loss payee and issue them
Get proof of insurance. Your contract could
require clients to provide you with a property binder or a
certificate of property insurance. These standard forms can be
issued by an insurance agent to show that a property is insured
for a stated amount. A binder is for a finite period of time,
usually 30 days. The certificate is supposed to last until the
next renewal; the certificate holder — the remodeler
— is notified if the insurance is cancelled.
Get ahead on payments. Another way to avoid being
owed money when a client suffers a loss is to use an aggressive
payment schedule. You won't need to collect anything if you are
ahead on payments. In fact, if you're far enough ahead, the
client may be entitled to collect something from you. Still,
that's no reason to avoid talking to the client about insurance
coverage. A lot can happen when clients are desperate and
unhappy — they could blame the contractor for a loss he
didn't cause, for instance. It's much easier to smooth things
over if there's enough insurance money to rebuild the
My company wrote the policy for an $800,000 custom home that
was hit by lightning and burned to the ground a week before the
owners were supposed to move in. Fortunately, the project was
adequately insured, so the contractor got paid for the work he
had done, including overhead and profit. Later, the contractor
made money a second time when the owner hired him to rebuild
What's not covered. Although the
homeowner's policy will cover completed work that's damaged or
destroyed, it won't normally cover materials that are on site
but not yet installed. These materials can be covered, but only
if the homeowner adds a builder's risk endorsement to his
homeowner's policy. It's in his interest to purchase this
endorsement, because if the contract makes him responsible for
uninstalled material, he needs to make sure there's a way to
pay for it. It's up to the contractor to insure his own tools
and equipment, which can be done with a tool floater.
Don't Count on the Bank
Many owners carry insurance because the mortgage lender
requires them to. Don't assume, however, that just because a
bank is involved the home is adequately insured. The insurance
may have been adequate when the owners first bought the house,
but if real estate values have increased since then, there may
be a lot of unprotected equity.
This is not a problem for the bank — but on a major
remodeling project it could be a problem for you. The bank is
worried about protecting its interest in the property, which is
equal to the mortgage amount. The lender is usually one of the
loss payees on the homeowner's policy, and if there is a claim,
the lender always gets its share first. The lender doesn't care
whether there is enough money left to pay the remodeler.
Settling the Claim
Some claims can be settled in a week, but others go on forever.
It's all about determining the value of what was damaged. It's
easy to settle on new parts of the building, because their
value is spelled out in the contract. If the work isn't
complete, the adjuster can determine its value by reviewing the
progress payments and job inspections. It's a lot easier to
settle when the contractor keeps good records.
Messieris vice president of Mason
& Mason Insurance Agency's Construction Industry Services
in Whitman, Mass.
Staying in Touch With
A periodic newsletter is a great way to keep your company on
the radar screen of both previous and prospective clients.
Builders David and Michele West, owners of Meadowview
Construction in Topsfield, Mass., have recently replaced their
company's mailed newsletter with a one-page electronic version.
It goes to a rapidly growing list of e-mail recipients in the
company's electronic database.
Now that paper and postage are no longer needed, the Wests
measure the cost of producing the newsletter in time spent. It
takes about 15 hours to gather and format the contents. Michele
uses PageMaker software to create the document and sends it as
a regular e-mail attachment to some 700-plus recipients. Since
she has to send in small batches to avoid overloading her
e-mail program, this operation has proved to be somewhat
cumbersome, so she plans to switch to an html (hypertext markup
language) format. That will allow her to skip the attachment
step and send the newsletter as a Web-based link. Not only will
this speed transmission; it should also eliminate recipient
concerns about opening an attachment and downloading a computer
Builders David and Michele West recently
switched over to an electronic version of their company
newsletter. They're still working out some kinks in the
transmittal process, but the response thus far has been
Within two weeks of sending "Volume 1, Summer 2005," the Wests
received a dozen responses and picked up a couple of small
jobs. Their long-term goal is to keep adding names to the list
and to send the letter at least once a month.