Builders Risk Insurance seems, like Flood Insurance before Hurricane Sandy, to be an afterthought.

My good friend, Jackson Robert, a Loan Officer with Prospect Lending, Inc., and a fellow member of the Bedford-Stuyvesant Real Estate Board, sends out weekly emails about trends and happenings in the mortgage industry.

This week’s email was an infographic about the 45-day Renovation Loan process. I was shocked to see no mention made of well, one of my favorite topics, insurance, and in this case, Builders Risk insurance.

So, I sat down and wrote this letter to Jackson. When I was finished, I realized I had the makings of a good blog. So here it is!

Greetings Jackson:

First, thank you for the great emails you send about mortgage lending. They are extremely informative, and when I share them with my clients, you make me look like a genius!

Regarding your latest entry about the 45-day renovation loan process I just have one question – What about the Builders Risk insurance?

Now, most people think they’ll just call a broker and get a quick quote over the phone.  Believe me, it’s not that easy.

A normal homeowner’s policy will not provide protection during any significant renovation. Many so-called “Insurance Experts” will convince your renovation loan clients that a regular homeowner’s policy is all they need. Once the company inspects the property, and believe me, nowadays they inspect every risk, the application will be rejected, and coverage cancelled. This can often make it more difficult to secure proper coverage because few insurance companies like to underwrite a risk once work has commenced.

The homeowner needs to secure a Builder’s Risk policy. Most insurance companies will require the following information in order to generate a Builder’s Risk insurance quote:

1. A complete Scope of Work from the contractor who will be performing the work. This provides a room-by-room breakdown of the work to be performed, the cost for each job, and the time needed to complete the work, including required inspections.
2. Certificates of Insurance for the contractor’s Worker’s Compensation, State Disability, and Commercial Liability insurance policies. The homeowner should be listed as an additional insured on these certificates. Your lending institution may also want to be listed on theses certificates. I’d suggest checking with your legal department about that.
3. Copies of the contractor’s license. In New York City, this license is usually issued by the Department of Consumer Affairs. Caveat: The New York City license does not give a contractor the right to perform similar work in any other county. They must be licensed by each county or city.
4. A copy of their listing on the New York City Department of Buildings website.
5. The contractor’s resume or Statement of Ability regarding their past experience with the type of renovation you’re providing lending for and length of time in the business.
6. Verifiable references from past clients the contractor has worked for in the last six (6) to 18 months.
7. You also want to get the same information for any subcontractors involved in the renovation.I can’t emphasize enough the need to get the contractor’s firm estimate of the amount of time it will actually take to secure the necessary permits, materials, workers, and perform the work. Builders Risk policies are issued for terms of three (3), six (6), and nine (9) months, or one (1) year. The premium for these policies must be paid in full once bound and are fully earned.  So, if the client purchases a policy with nine (9) month duration, and the work is completed in seven (7) months, there is no pro-or-short rated return of premium.  One the other hand, if the work was supposed to take six (6) months and will, for various reasons, take longer, the homeowner will be forced to purchase another Builders Risk policy. Here’s a tip: If the contractor says the work will take six (6) months, purchase a policy lasting nine (9) months or a year. One good local disaster can set work and inspections back at least three (3) months.

For the insurance broker:

1. Provide the insurance broker with a copy of any existing appraisals so they can prepare a before and after replacement cost estimator for the insurance company.
2. Give the insurance broker at least five (5) business days to do their calculations, write-up and submissions.
4. Inform the insurance broker whether this policy is being put out for bid so they can decide whether they want to offer one. These policies require a great deal of up-front work, on spec. Based on the type of risk, and the client’s relationship with other brokers or agents, an insurance broker may decide to not offer a quote.

A Final Thought

Don’t forget to discuss the need for purchasing flood insurance for these risks. Just imagine the catastrophe when, just a week before the job is done, the water main in the street outside the home breaks, or a severed rainstorm or hurricane and sends thousands of gallons of water rushing into your clients almost-completed home.

Jackson, I hope this information will improve your renovation lending success. Thanks again for the great emails.

You can contact Jackson Robert, Loan Officer with Prospect Lending, Inc. at 917-941-5018. You can also send him an email to [email protected]. 

BrooklynCovered.com is the online alias of none other than Eustace L. Greaves, Jr., LUTCF, a Brooklyn-based insurance agent and broker with more than 30 years of meeting his clients insurance needs. Send your insurance questions to Eustace at [email protected] or [email protected] .