Course of Construction Homeowners Insurance.

I recently had dinner with a friend of mine who is building a new home. He is actually doing a complete rebuild of his older and much smaller house. Being an Insurance agent I joked with him about the liability hazard of his front yard being a construction zone. I asked him if he had a contractor’s liability policy or course of construction policy for his home. The answer was no to both questions, which was alarming to me.
Homes undergoing complete remodeling, or rebuilding to this extent do not have coverage under the standard homeowner’s policy, especially if the property is not occupied due to the extensive work taking place.
The proper coverage in this situation is a course of construction policy which needs to be purchased before work begins on the property. This kind of coverage is usually limited to 12 months with an optional 6-12 extension if needed to complete the project. It covers you against liability and loss to building materials on site. The other thing to consider is a contractor liability policy especially if you are acting as your own contractor, which is allowed if you are working on your primary residence, and are using sub-contractors to complete the job.

Please consult your Insurance Agent/Broker regarding proper coverage before you begin a project like this. You will also want to update your homeowners policy after the construction is complete to make sure your have sufficient coverage for your new property, and also ask for the new home/Age of home discounts where available.

Always check with your Insurance Agent/Broker before making any changes to existing policies or coverage limits.

Why buy a Personal Umbrella insurance policy?

A Personal Umbrella Policy provides excess liability protection for damages you may be found liable for over and above your auto, Homeowners, condo owner, renters, Landlords, Boat owner, Motor home and other personal insurance policies that provide personal liability coverage. Personal Umbrella policies generally start at a minimum of $1,000,000.00 and most companies go up to $5,000,000.00 or higher. These policies exclude business related exposures, so if you own a business, even a small home business liability claims resulting from business operations will not be covered under the Personal Liability policies. Businesses are covered through a separate General Liability policy or a Business Owner policy, which will be covered in a different article.

Do I need a Personal Umbrella Policy?

The answer is simple, just list all your assets like Home equity, Stocks, Bonds, Mutual Funds or any other investment accounts (not related to retirement account like IRA’s, 401K’s or 403B’s), Life insurance policies with cash values, cars you own and any other liquid asset. If you are not sure call your accountant and ask him to evaluate your balance sheet and let you know what your Net-Worth is. After you are done totaling your assets add your annual income (combine income for married couples). The number you come up with is the minimum level of liability coverage limit you need to buy. Let’s say you have $300,000 equity in your home, your investment portfolio is worth $750,000 and you have $150,000 equity in an investment property, and your annual household income is $145,000. Adding all those assets total $1,345,000 so you need to protect at least $1.4M of your assets. You will need to purchase a $2,000,000 Personal umbrella policy because you need more then $1M and most insurance companies will not sell these policies in a $500,000 limit.

Where can I buy a Personal Umbrella Policy?

1. Call your Insurance Agent/Broker. The Agent who is insuring your Home and Auto will probably be able to set you up with a PUP (personal umbrella policy).
2. If your driving record is less then perfect or if you have a liability claim in the last 5 years you will probably need to search for high risk insurers online or contact an Insurance Broker.

Important information:

It is important that you gather some information prior to calling an agent/broker. I recommend finding all your insurance policies like Homeowners, Auto, Motorcycle, Motor home, Boat owner … and any other personal policies that provide liability coverage like Landlord, Renters … I also recommend making a list of all your household members, because you want to make sure no one is omitted from the policy because you didn’t disclose them to the agent/broker. Also remember to list any additional properties and vehicles you own as well as any family pets. Be honest with your agent and disclose all the information so that he/she provides the highest and most suitable level of coverage. There is no point in paying for this policy and not disclosing to the insurance company that your family pet is a pit-bull, because dog bites may be excluded from the policy and you didn’t know because you didn’t tell your agent/broker upfront. You can see how this could present a problem if Sparkey decides to bite the mailman, or even worse like your child’s friend or one of your guests during a holiday party.

Check with your Agent/Broker for their underwriting guidelines and policy exclusions and don’t be afraid to ask questions.

Why buy an earthquake insurance policy?

Many homeowners in California don’t think they need to purchase Earthquake insurance because they can always tap into the equity of their property in the event they have earthquake damage. Well that may have been true 2 or 3 years ago when the real estate market was piping hot, and we saw an average annual equity increase of 22% or higher in some areas. The reality now is that most areas in CA have been experiencing a sharp decline in property values over the last couple of years, and many homeowners are finding themselves in a negative equity position.

So what happens if your home is worth $600,000 and you mortgage balance is $450,000 and an earthquake hits close to home? Most homeowners think that nothing will happen to their property, but what if does happen to their property and they don’t have an earthquake insurance policy? Historically we have seen an average 25% price reduction in real estate value after earthquake damage. Now I am talking worst case scenario which is the reason to own an earthquake policy. So if your house was worth $600K and you have earthquake damage (and you don’t have earthquake coverage), and it is now worth $450K which is the same as your mortgage balance you now have four options:

1st Option: Wait for FEMA to bail you out which may take a while and you will probably have to keep making your mortgage payment while also paying rent, because you are now displaced from your primary residence.

2nd Option: Go to the Bank and get a loan to repair your home. This isn’t a bad choice except for the fact that we are in a severe national credit crunch and most banks nowadays will not loan money against your home unless you have equity (and a lot of it), and even if you do equity they are extremely selective on who they will approve for a loan, so even if you have good credit an a decent documented income they may still not loan you the money … anyway I think most will agree it isn’t favorable out there right now.

3rd Option: Walk away from your home! Give up the house! Voluntarily surrender it back to the mortgage holder because you can’t live in it and don’t have the money to fix it, so you’re going to have to pay rent instead of your mortgage.

4th Option: Keep paying the mortgage payments, pay rent somewhere while your house is being repaired and come up with the money required to repair the house on your own somehow … an improbable option for most people.

It looks like a lose-lose situation picking any of the 4 option.

Now what would happen if at the same scenario you did have earthquake insurance? Well after the dust settles and the dogs stop barking you call your insurance company and file a claim, the adjuster comes out, you get several proposals from licensed contractors, the insurance company may even pay for you to rent temporary housing, buy new cloths, shoes, electronics and toys for the kids. Life will go on as usual and in a short period of time you will be back at home watering your front lawn, while your next door neighbor (who didn’t think he needed earthquake insurance) is still living in a tent in his back yard.

Obviously there are some exclusions that come with an earthquake policy (check with your insurance agent/broker), and there is the dreaded deductible everyone is scared of, so here is how you deal with the deductible: Get the lowest percentage deductible you can which most likely be 10% and here is how the deductible will work on a $400K dwelling coverage with a 10% deductible your earthquake damage will have to meet or exceed $40K for the insurance to start paying. You only need to meet the 10% deductible on your dwelling coverage in order for the policy to start paying for loss of use, personal property loss and building code upgrades … the policy doesn’t have a separate deductible for each coverage just one based on the dwelling limit, so here is the math for you.

Dwelling coverage is $450,000 with a 10% deductible; personal property coverage is $50,000 loss of use is $15,000 and building code upgrade coverage is $10,000. Once you meet the deductible limit of $45,000 the policy will start paying up to the following limits:

Dwelling $450,000 - $45,000 = $405,000
Personal Property $ 50,000
Loss of Use $ 15,000
Building Code upgrade $ 10,000
Total Maximum payout $480,000

Now does this make things much simpler in the event of an earthquake? Wouldn’t you feel more comfortable attending to your family and getting over a traumatic event such as a major earthquake, without fearing for your families financial future or where you will live if your house is damaged or destroyed due to an earthquake?

The coverages explained in this article are based on the CEA policy features and coverage limits and exclusion. Coverage may vary with other carriers. Check with a licensed insurance agent/broker for policy limits and exclusion prior to buying this product.