Building homes is a complex and risk-heavy operation. It takes tons of materials, dozens of different specialized trades, and tremendous logistics to close a property. To manage the many hidden risks, insurance is a necessary tool. While purchasing every required type of insurance coverage can effectively reduce risk on a build, poor insurance compliance execution can lead to disaster.
"Proper management of certificates of insurance is a critical step in managing risk for a home builder," said Charles C. Shinn, founder of Shinn Builder Partnerships. "Insurance is a very technical product; one wrong step can have serious consequences. Having a trusted partner to ensure proper coverage is in place is invaluable."
Here are the three biggest hidden insurance liabilities for home builders:
1. Not verifying certificates of insurance
I spoke with a custom home builder who had built a $6.5 million house. For the wood floor installation, he hired a small contractor and followed protocols. He collected the certificate of insurance before the project started and had the job bid out. When the tradesman started, the installer used his moisture meter to make sure the moisture barrier was effective. Then he installed a beautiful wood floor in this magnificent home.
Unfortunately, soon after he finished, the floor started buckling. The entire installation soon became a mess and was a total loss. The first thing the builder did was check the installer’s moisture meter. It turned out that the meter was calibrated incorrectly; the installation was doomed from the start.
The builder had collected the certificate of insurance, but he skipped a simple step, which cost him dearly. The subcontractor fabricated the COI and did not actually have insurance in place. Verifying the information on the certificate would have revealed the lack of a valid policy. As it was, the builder was on the hook for a new floor.
This story is so common that probably every builder has a version of it or is dodging bullets on a job somewhere. After all, verifying all the information on a certificate of insurance is a tedious and mind-numbing job. It is time spent that doesn’t produce any income and is manual and error-prone. The solution is to either put in the time to verify the information or utilize technology that can automate the process.
2. Filing away a certificate of insurance and moving on
Just because a subcontractor has insurance when the certificate was submitted doesn’t mean the policy stays in force for the entire life of the project. Periodic updates (especially before the final check gets cut) can save a bundle.
One builder told me about a subcontractor who framed 20 houses in a subdivision for him. Less than eight months later, major problems started showing up in all the homes. Unfortunately, the framer was out of business by then. As his business was failing, the framer started taking shortcuts to save money. One shortcut was cancelling his insurance shortly after he started the job. If the builder confirmed that the insurance was still in place before he cut large checks, he could have covered himself against the loss.
3. Not checking policy exclusions
The owner of a fourplex hired a roofer to do a job and thought he had done all the right things. He had used this roofer on another remodel job that was a fix and flip and had a good experience. He already had a certificate of insurance from the other job and thought he was covered. Unfortunately, he didn’t check the exclusions on the policy, which specifically excluded multifamily jobs. As a small investor, he could have been wiped out by this simple oversight.
Cutting corners on insurance compliance can be disastrous
In an ideal world, insurance compliance would be handled by a dedicated in-house risk management professional. But many companies don’t have the budget or volume to hire a full-time risk manager—or even to outsource the tasks.
Fortunately, technological advancements in the risk transfer space have simplified the automation of tracking and verification of subcontractor insurance with a high degree of precision and accuracy. With all the ways that problems can occur in development projects, solving issues associated with insurance compliance by pairing comprehensive in-house compliance strategies with the right software tools and technology partners can significantly decrease your risk.
Danny Schayes is the director of business optimization at TrustLayer Inc., where he helps customers with technology solutions for insurance compliance tracking and verification. In more than 20 years in the business, he has bought and sold more than 1,000 residential units and developed subdivisions, multifamily units, and luxury homes. Reach him at 407-808-0024 or danny@trustlayer.io.
