If you have carefully checked your contractors’ references and you know that you will be dealing with an experienced, skilled contractor with integrity and great references, you already have the best insurance you can get. But in case something goes wrong and the remedy requires more than you or your contractor can afford, you may want to consider some extra protection. Third-party assurances including insurance, bonds and cash, can provide you with that protection.

COMBINED GENERAL LIABILITY INSURANCE

"GL" insurance includes both property damage and personal injury coverage. There are two ways that a liability policy can be underwritten:

• Under an occurrence-basis policy, if the insured event happens during the policy period, but is not discovered until after that policy has expired, the insurer is still obligated to defend and pay for any claims.
  
  
• Under the claims-made-basis policy, the insurer is only obligated for the defense and payment of those claims made against the insured while the policy is in force.

The insurance business is constantly changing the way they underwrite their policies. I believe there is now a hybrid policy available. Try to get your contractor have his policy underwritten on the occurrence basis; if that’s not entirely possible, be sure to have a long conversation with your own agent so you understand what kind of coverage you are getting.

A BOND

A bond is a three-party contract that protects the property owner by holding the bonding agent responsible for the contractor’s performance. Securing a bond can be an expensive proposition requiring a complete set of financial statements and a financial audit by the bonding agent. Although the bond gives the owner better security, the cost of getting the bond will be passed on to the owner in the contractor’s prices. This is fair. It’s a legitimate cost of doing the work. You must determine whether or not the extra coverage is worth the extra cost before you decide to require a bond.

WORKERS' COMPENSATION

Workers Compensation allows contractors to compensate workers injured on the job or workers who develop work-related illnesses. Whether or not your contractor is obligated to carry this insurance is determined by state law. In some states, North Carolina, for example, it is the responsibility of the property owner to find out whether or not the contractor is obligated to carry this insurance, and if he is, that he has complied. If the owner neglects to purposefully hold the contractor responsible, and there is an accident, the property owner is held doubly liable for the compensation awarded by the courts, and there is a misdemeanor charge that comes with that as well. YIKES! Find out what your state requires of both you and your contractor by calling your state Department of Insurance.

A WARRANTY

A warranty is a promise from the contractor that his work will meet the standards set in your contract and those set by the building codes or they will make repairs at no charge to you. Contractors generally warrant a construction job for one year from the date of the final check, however this is negotiable. Manufacturers may warrant different parts of their products for different time periods. For example, a refrigerator compressor may be warranted for five years but the box may only be warranted for one.

A WARRANTY TRUST FUND

The Warranty Trust Fund is a creative and unusual form of insurance, invented by Remodeling Coach. This fund is created by putting a bit of the contractor’s money in an interest bearing checking account at the beginning of the project, and holding it there — earning interest — until all of the warranty obligations are fulfilled. This allows the owner access to cash if the contractor doesn’t honor his obligations (under certain circumstances defined in the contract) but doesn’t cost the contractor a thing if he does. Matter of fact, he’ll get the balance in the account back, along with any accrued interest, at the end of the project if all of the work is done correctly.

OWNERS’ AND CONTRACTORS’ PROTECTIVE LIABILITY INSURANCE

Sometimes called Builders’ Risk, this insurance protects the insured homeowner against liability for actions of independent contractors, including liability due to the homeowner’s failure in supervising independent contractors’ work. Some obligations, such as the owner’s obligation to protect the public, cannot be transferred to the contractor. The owner may be sued even though the contractor uses great care, as well as when the contractor fails to provide appropriate safety measures. Owners should consider purchasing this kind of insurance for the duration of the construction period.

CONTRIBUTORY NEGLIGENCE

When the plaintiff has contributed in some way to the accident or damages, the defendant will not be held entirely responsible for medical bills or repair costs. A good example of this would be if your toddler wandered into the work area and hurt himself, the court might decide that you should have kept the toddler out of the work site.

Note: I am neither an attorney nor an insurance agent. The information in this article is based on over 20 years of construction management experience that included working with attorneys and insurance agents, but before you decide what to purchase or what to require of your contractor, please consult a professional.

MORE INFORMATION

You’ll find lots more information about the home remodeling process in Managing a Renovation: Staying in Charge and Out of Trouble, our friendly and comprehensive homeowner’s guide to remodeling project management. Download the table of contents and a sample chapter, or go to the order form to purchase it.

We offer ready-to-use construction forms, including a complete remodeling contract, in our Bookstore, as well. Have a look.

And, you may want to look at our list of More Resources for some great design ideas.

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