Don't Let Your Homeowner Purchase and Manage the Builders Risk!
Let’s be honest, insurance sucks! If you could have somebody else be responsible for dealing with it… like the homeowner… why not? I mean, it’s their house, they should pay for it. Plus, if there’s something wrong with the policy that’s on them, right? No! Not right.
There are many reasons why the builder should always handle the builder’s risk policy. Today I’m going to talk about the main reason why a homeowner should not be involved in the process.
Here is the thing, you are the builder, the one with the relationship with the subs and suppliers. You are the hierarchy on the jobsite, and it is your job (amongst other things) to make sure the project is protected from theft, vandalism, fire etc. If we can all agree on this, then we can agree that there’s never a scenario where you want the homeowner involved in your business let alone your financials.
Let’s go a little deeper; the home is near completion. An interior trim carpenter comes by Friday afternoon to finish some last-minute work. While he is at the job site he gets a call from his wife, she just went into labor. In a frenzy he rushes out of the home through the security fence and forgets to lock up the job site.
A few hours later, you have a group of… (pick your imagery) teenagers; homeless; criminals; spoiled privileged kids…walk by the unsecured jobsite, and decide to go in. It’s Friday night they call their friends, tell them to bring booze and suddenly you’ve got Animal House. (If you don’t know that reference, we have bigger problems.)
Because it’s Friday they realize they have the whole weekend, and they party it up. Monday morning, the homeowner stops by (the home was almost finished, so they are probably stopping by quite a bit). Here are just a few things they could possibly see; vandalism, theft (appliances, copper, water heater, etc.); home in ashes due to somebody’s careless cigarette.
In this scenario the homeowner owns the policy and now they must start the claim process. As they work through the process with the adjuster, trying to answer questions about construction they know nothing about, they start to think that maybe this isn’t such a bad thing. The cost of real estate is up 30%, they’re confident they can get a high settlement claim since costs have gone up.
The homeowners start fantasizing about the settlement money and imagining enough money that they can upgrade all the bathrooms with that Italian tile they saw on their honeymoon and maybe have some left over to take a second honeymoon.
Then reality sets in. They receive their settlement check, and it’s not at all what they expected. Partially because they had their personal lines insurance agent write the policy, and generally an agent that doesn’t specialize in construction doesn’t approach the builder’s risk in the same manner a construction specialist like SIS would. Therefore, there is no coverage for things like soft cost, change order, and they didn’t consider increasing the coverage amount to factor in things like inflation, increased materials, and labor cost.
In the beginning, we established that the builder is the hierarchy of the job. Because it was your subcontractor that left the home open, they are going to look to you to make up the cost. At first you are fine with that, and obviously want to work with the homeowner to make it right. But they had a number in their head, and that number, as unreasonable as it may be, is going to make it difficult for you to bridge that gap.
This is where the animosity and the pointing of the finger starts, and eventually, attorneys are called.
Let’s look at a different scenario; the builder (you) is the owner of the policy, you communicate with the adjuster in a language that the adjuster understands, you receive a top dollar settlement, you repair or rebuild home. Done. One sentence.
Obviously, that is the best-case scenario. The worst-case scenario is you made a mistake and didn’t factor in soft cost, or the policy wasn’t written to adjust for material increases, change orders, etc. The good news is those mistakes are yours and you can recover from that. You can make up the costs behind the scenes to get the job done.
Here's my point, you do you not want to have conversations with your homeowner about construction costs versus real estate market value. That money is there to rebuild or repair the home and as the construction professional, you should oversee that process from beginning to end. That means, purchasing and managing the builders risk policy.
NOTE: The cost of the builders risk policy should always go into the insurance line item in your construction budget.