After deciding the method of financing for the custom home building process, you need to address some other issues, such as those regarding owner builder insurance. If you arrange outside financing for your project, the lender requires insurance to cover several issues, these being at least liability, workers’ compensation and course of construction.
Owner Builder Insurance Criteria
Liability owner builder insurance is required by the lenders, as it protects you against someone getting hurt on the property or by the actions of somebody working on the property, to be carried by either you or the contractor. If the contractor carries the policy, the policy needs to meet some criteria to satisfy most lenders. These criteria might be as follows:
- It must be in the form of a comprehensive general policy for $1 million or the loan amount, whichever is greater, or be a policy including broadform liability endorsement.
- The contractor must be named as the insured.
- You and the lender must be named as additional insured.
- The property address must be included on the certificate.
In some cases it might be necessary to carry this policy yourself because sometimes it can be expensive for a contractor to get a liability policy if he doesn’t already have one. This means that the cost will be added to your budget and considered for financing. This type of policies vary in cost by state and the size of your home. If you’re carrying the policy or are an owner-builder, then you can get the liability policy with a few changes:
- The contractor doesn’t need to be named.
- You are named as the insured.
- The amounts change to $500,000 for each occurrence, extended to both property and personal injury or the loan amount, whichever is greater.
The workers’ compensation policy is usually carried by the contractor if he has employees. You can ask to see the certificate because the lender will as well. In many cases, however, the contractor doesn’t have his own employees and hires his labor and subs as independent contractors. This scenario implies that these independent contractors fall under your liability policy in case of an accident. Lenders usually allow for this situation by having you and the contractor sign a waiver so the lender isn’t held liable for any workers’ compensation violations.
Owner Builder Insurance Importance
The course of construction policy protects you in case of theft, fire, weather, or other damage to the house while it’s being built. So if, for example, your plumber drops his torch and burns down the framing, this policy pays for the cost of rebuilding the house to its previous condition before the damage. All kinds of work related accidents are covered by this policy. Lenders absolutely require this policy to be in place before they fund loans. The cost of this policy varies depending on your state and the size of your home. The course of owner builder insurance policy needs to meet the following criteria:
- Coverage must be in an amount equal to the estimated replacement value of the improvements to be built or the loan amount, whichever is lower. Guaranteed replacement is usually acceptable instead of a specific dollar amount.
- The borrower is the named insured.
- The lender is named as the “mortgage and certificate holder.”
- The property address and/or legal description is listed on the owner builder insurance certificate.
- The maturity date on the owner builder insurance is at least one day beyond the end of the construction loan term.
It is obvious from the aspects discussed here that an owner builder insurance policy is mandatory in the custom home process, and you should keep it in mind before starting the project.