Builder’s Risk insurance is the insurance needed when your home undergoes a mid-size or major home renovation.
Builders Risk Insurance and Flood Insurance should not be an afterthought
Home renovations mean buying Builders Risk insurance to protect your investment!
Jackson Robert, NMLS # 422697, a Loan Consultant with Loan Depot, sends weekly emails about mortgage industry trends and events.
This week’s email discussed the 45-day Renovation Loan process. It shocked me it lacked any mention of the need for Builders Risk insurance.
So, I sat down and wrote to Jackson. When I finished, I realized it was important to reshare this information.
First, many thanks for your great emails about mortgage lending. They are extremely informative. And, when shared with my clients, they make me look like a genius!
Regarding the 45-day renovation loan process, I just have one question – What about the need for Builders Risk insurance?
Now, most people think they’ll just call a broker and get a quick homeowner’s insurance quote over the phone. Believe me, it’s not that easy.
A typical homeowner’s policy doesn’t protect during a mid-sized or major home renovation. Many insurance agents and brokers mistakenly place homeowners insurance policies on homes carrying 203(k) loans. They don’t realize they are placing their clients in.
They forgot insurance companies inspect most properties they insure
New York State licensed insurance companies are given a “60-day free look,” beginning with the day a homeowner’s policy goes into effect. During this period, the insurance company hires an outside inspection company to do exterior and interior inspections of the insured property.
One major deficiency an insurance company inspection uncovers
Insurance companies hate to insure homes remaining vacant for significant periods of time. Should the inspection uncover the home is vacant while undergoing a mid-sized or major renovation, the company can reject the application within the first 60 days. And because the policy was canceled for cause it becomes more difficult to secure new coverage for two reasons:
- This is because many insurance companies won’t underwrite a risk once work has commenced.
- The original application for coverage could be considered fraudulent. And no insurance company wants to approve any fraudulent application.
How a homeowner purchases a Builder’s Risk insurance policy
The homeowner getting a 203(k) loan or making mid-sized to major renovations to their home must purchase a Builder’s Risk insurance policy.
Most companies offering Builder’s Risk insurance policies require the following information to generate a Builder’s Risk insurance quote:
- A complete Scope of Work from the contractor who oversees the work. This is 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 all required inspections.
- Certificates of Insurance for the contractor’s Worker’s Compensation, State Disability, and Commercial Liability insurance policies. The homeowner must be listed as an additional insured on these certificates. Your lending institution may also want to be listed on these certificates. I suggest checking with your legal department about that.
- 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.
- Their listing is on the New York City Department of Buildings website. (You can find this website at https://www.nyc.gov/site/buildings/industry/check-license-registration-status.page.)
- The contractor’s resume or Statement of Ability regarding their past experience with the type of renovation being done and length of time in the business.
- Verifiable references from clients the contractor worked for in the last six (6) to 18 months.
- You must get the same information and documentation from subcontractors involved in the renovation.
Get firm time estimates
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, and workers, and perform the work.
How long do Builders Risk insurance policies last?
Builders Risk policies are issued for terms of three (3), six (6), and nine (9) months, or one (1) year. Premiums for Builders Risk policies must be paid in full once bound and are fully earned. So, if the client purchases a policy with a nine (9) month term, and the work is completed in seven (7) months, there is no pro-or-short rated return of premium.
When renovations take longer than anticipated
On the other hand, if the work was supposed to take six (6) months and will take longer than anticipated, the homeowner must purchase another Builders Risk policy. Remember this: If the contractor says the work will take six (6) months, purchase a policy lasting nine (9) months or one year. Just one local disaster can set work and inspections back at least three (3) months.
For the insurance broker:
- Give the insurance broker a copy of any existing appraisals. Then they can prepare before and after replacement cost estimators for the insurance company.
- The insurance broker needs at least five (5) business days to do their calculations, write-ups, and submissions.
Give the insurance broker a friendly heads-up
Tell the insurance broker when you put the policy out for bid. Then, they can then decide whether they want to invest time to develop a quote.
These policies demand a huge up-front investment of time and energy. Based on the risk type, and the client’s relationship with other brokers or agents, an insurance broker may decide to not offer a quote.
A Final Thought about Flood Insurance
Furthermore, don’t forget the need for purchasing flood insurance, even for buildings undergoing significant renovations. Flooding creates damage not typically covered by either home or Builder’s Risk insurance policies. Flood damage caused by broken water mains, or severe rainstorms, or hurricanes could inundate the home, thus creating an uninsured loss.
Jackson, I know this information will greatly improve your success in making renovation loans. Thanks again for the great emails.
About our expert:
Jackson Robert is a 23-year veteran of the mortgage business. You can contact Jackson Robert, your favorite Loan Depot Loan Consultant, NMLS # 422697, at 917-941-5018. You can also email him at [email protected]
About the author
Eustace L. Greaves, Jr., LUTCF, is an NYS-licensed Independent Insurance Agent and Broker. He has 41 years of experience, 26 of those years as the owner of Bridge Insurance Agency.
Like to speak with Eustace?
Eustace wants to assist you with your home, life, flood, disability, renters, auto, cooperative, condominium, and wedding insurance needs. You can reach him at his mobile number, 718-489-2218, his office number, 718-783-2722, or by email at [email protected]. Or, go to his website, https://greavesinsurance.com, and complete any of the available “Contact Us” forms.
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