6/21/2018 By Agent Ken CobbBy Agent Ken Cobb
If you are planning to build a new home, this is an exciting time and also a very busy one; you will have hundreds of decisions to make, both large and small. Chances are, insurance won’t be front and center on your mind, but it is important to make sure that your home is covered in case there is a loss while it is being built. Homes under construction aren’t immune to fire, tornado or wind damage, for example.
So who is responsible to insure your home while it is being built, you or your contractor? It depends on who owns the home and property during construction. Quite often, that is you. If you own the land and take out a construction loan for the building project and then hire a contractor to do the work, you own the home while it is being built, and if it burns down, you are the one who has suffered the loss.
In some cases, we see contractors who agree to finance the home construction process. They own the land and build the home at their own cost, to your specifications and according to your wishes. Once the home is complete, you take out a mortgage to purchase the new home from the contractor. (This arrangement is common in many new subdivisions and can also be a good work-around for home buyers who aren’t able to front twenty percent down for a construction loan.) In this situation, it would be the contractor who suffers the loss if the home burns down during construction, and the contractor will need to insure it until complete and purchased by you.
Assuming that you will own the home while it is being built, it is your responsibility to insure it during the build. If you will have a construction loan, your lender will likely require this. Even if you are self-financing the entire building cost, you probably don’t want to gamble on there being a loss while your new home is being built.
In most cases, the best way to insure a home you are building to be your future residence is via a Homeowners insurance policy – the same policy that you will carry once the home is complete and you are living there. While under construction, your coverage will probably be similar to how it will look when the home is done, with maybe one or two added provisions thrown in that are relevant to the building process. Typically, you will want to start this policy as of the closing date of your construction loan, or at least before you begin to build.
Covering the Structure
Your Homeowners insurance policy will likely insure the home for its completed value, based on its estimated cost to rebuild if a loss occurs once complete. The intent would be that if the home burns down while only partially complete, your insurance policy will pay what is necessary to rebuild the portion that was already there.
Your agent will likely ask you for a copy of your plans so he or she can complete a replacement cost estimate, to determine how much to insure the future home for. Keep in mind that this estimate may come in higher than your anticipated construction cost, for several reasons. First, if you are doing any of the work yourself, this reduces your construction cost, but a replacement cost estimate will be based on hiring all work done by others. Second, it can cost more to rebuild a home than its initial cost, due to debris removal expense, economy of scale differences and having to work around existing landscaping. Thirdly, as someone who recently built a home, I can attest that you can never think of everything when budgeting out your construction costs, and it is realistic to expect your final cost to be higher than you originally planned.
Don’t overlook insuring the building materials that have been delivered to your building site but not yet installed. This could be the load of lumber that will be used to frame your home, the windows, your kitchen cabinets or the interior flooring, etc. Most standard Homeowners policies don’t automatically cover theft of these materials for a home not yet complete and occupied. This is an optional coverage that you should consider adding for an additional premium.
When adding insurance for theft of building materials, you will have to specify a limit for this coverage, which will determine how much it costs. The coverage may last for a specified period of time (such as 90 or 180 days) and is usually not refundable should you choose to drop it before it runs out.
Liability for injuries
If you buy a standard homeowners policy for your home under construction, it should automatically come with liability coverage in case there is a claim against you for an injury on the construction site. Keep in mind, however, that while you would likely be named in any lawsuit, the injury might not necessarily be your fault. You should make sure that all builders and contractors working on your home have their own insurance (such as general liability and workers compensation), to reduce the chances that an injury claim comes back on you as the future homeowner.
So how much will it cost to insure your new home under construction? If insuring under a Homeowners policy, probably around the same amount as the premium will be once it is complete. However, you will have to add in the cost for any Theft of Building Materials coverage that you buy. One benefit you will enjoy is that most carriers provide a healthy discount when a home is brand new. A new home with all new systems and components (new electrical, heating, plumbing, roof, etc.) is less likely to suffer a loss, and this is reflected in lower initial rates. (Keep in mind that this discount will typically reduce at each annual renewal until completely gone after maybe five or ten years.)
Qualifying for Coverage
One factor that will affect how much you pay to insure your new construction will be which carriers are willing to insure the home while it is being built. If you have fewer options to choose from, you may end up paying a higher rate if the insurance companies with the best pricing aren’t available during the build.
Some carriers may simply decline to insure your home until it is complete and occupied, while other insurance companies may be choosier on which home constructions they are willing to insure. For example, many carriers require that you have a licensed general contractor building your home. If you are acting as your own general contractor or are using an unlicensed builder, you should still be able to get insurance, but your options may be more limited. Another factor affecting eligibility with a given insurance company may be how long the construction is planned to take. Many carriers require that a plan be in place to complete the home within a certain period of time, which can vary anywhere from 3 to 9 months.
The issues explained in this post are some of the things we look at when helping a client get their future home insured. Building a home can be both thrilling and stressful, but we hope you are able to put in place good insurance to reduce at least one element of concern. Good luck building, and I hope you really enjoy your new home in a few months!
About the Author
Agent Ken Cobb
Ken is the owner and principal agent at Pine Country Insurance in Bemidji. Active in the insurance industry since 2000,Ken uses his years of personal insurance knowledge and experience to assist clients in customizing insurance coverage to fit their needs. Ken considers himself a "farmer" rather than a "hunter"; rather than focusing on writing a lot of new policies as quickly as possible, he works on cultivating long term relationships based on trust with his clients. When writing new policies and meeting for annual reviews, Ken spends time with his clients explaining and helping them understand their insurance, and he is also pleased to share his knowledge with his blogging audience as well.
Ken Cobb is owner of Pine Country Insurance and has been active in the insurance industry for over 15 years. Meet Ken.
Coverage descriptions found in this blog are summaries provided for general educational purposes and cannot fully detail the terms, conditions, limitations or exclusions of a specific insurance policy. Please read your policy carefully.