Just as important as building quality homes is knowing how to protect them—and the rest of your business assets—along the way. Liabilities are everywhere. Effectively mitigating those risks is central to go from breaking ground to handing over homeowner keys and beyond without major losses, out-of-pocket costs, and litigation.
So, what should a builder’s complete risk management plan look like?
The companies best at managing risk combine insurance policies, proactive warranty protections, and internal practices to keep exposures under control and away from their business. Following these five steps ensures risks never outweigh the rewards of building beautiful homes.
Step #1: Carry the Right Insurance
Building the right insurance coverage offers builders an important financial safeguard. However, no one-size-fits-all policy exists. The size and scope of the job dictate which combination of policies are appropriate. The following are most common for broad protection (in addition to commercial general liability and worker’s compensation policies).
- Builder’s Risk
This specialized property insurance protects buildings under construction. Builder’s risk generally covers weather events, theft, and vandalism. The policy also addresses materials, supplies, and on-site equipment. Coverage ends when the project finishes.
- Professional Liability
Mistakes happen. Professional liability insurance protects against losses incurred from errors or omissions in professional work. The coverage addresses the financial impact, such as court fees, of these mistakes but does not cover the cost of correcting them.
- Pollution Liability
Pollutants include anything introduced into an environment not native to the habitat. Think paint, equipment fuel, and foam insulation just to name a few. This insurance covers liabilities caused by pollution incidents occurring at a job site. CGL policies often exclude pollution incidents which makes this an important separate coverage.
- Business Vehicle and Commercial Auto
Home builders with vehicles titled to the business or with employees using personal vehicles for professional use need an auto insurance policy. The coverage includes injuries or damages to third parties and their property caused by a driver operating a vehicle. The policy should include all owned, hired, and non-owned vehicles affiliated with the company’s work.
- Inland Marine/Equipment Floater
This policy applies to builders transporting equipment, tools, and supplies between work sites. Other coverages mentioned apply specifically to the job site. Inland marine protects what happens between those sites.
- Cyber Risk
Cyber insurance is important for builders using third-party technology or smart devices on job sites. Cyber liability covers network security failures, which can include data breaches, malware infections, cyber extortion, ransomware, and business email compromises.
Step #2: Add a 2-10 Warranty
A common builder misconception is “The general liability policy covers it all.” Unfortunately, that is not true. Even adding the policies listed above do not create total protection. Standard general liability policies are reactive, covering third-party damages after they occur. An insurance-backed warranty serves as a proactive partner protecting the builder from the costs of structural defects before they cause damage or injury.
A PWSC structural warranty specifies the builder’s responsibilities to the homeowner related to construction quality. With standard structural warranties, the builder affirms a new home will be free of qualified structural defects for 10 years or the state’s statute of repose. Should a defect covered by the agreement occur, the warranty provides coverage for the repair. Good builder warranties should also come with a defined claims resolution process that helps save builders and owners time and money by keeping issues out of court.
Learn more about how warranties and insurance policies serve as great risk mitigation partners by reading Covering Your Assets: How Liability Insurance and Structural Warranties Work Together.
Step #3: Track Subcontractors’ Insurance
So, you have your insurance policies in order. Great! How about your subcontractors? Do they have enough coverage to pay for project losses should something happen? Are you doing more than taking their word for it?
When your subcontractor is uninsured or underinsured and causes a loss, you may be left footing the bill.
The next step in developing a risk mitigation strategy is tracking the certificate of insurance (COI) and other important policy endorsements from every subcontractor working on a project. While full of valuable information to upstream parties, three details are key for every COI and insurance document review:
- An insurance policy is active and will not expire while the subcontractor works on the project.
- The policy covers the type of work the subcontractor is performing.
- The coverage amount is enough to restore the project should the subcontractor contribute to a loss.
Allowing a subcontractor to work on a project without verifying their insurance creates a huge, entirely avoidable risk.
Step #4: Develop a Quality Assurance Program
Quality control in construction ensures projects meet on-time, on-budget, customer-specified requirements. Quality assurance programs prevent many costly risks including unhappy home buyers, unpredictable expenses, and unsafe structures.
Best-in-class quality assurance initiatives focus on:
- Hiring and training the right staff
- Creating safety and construction standard accountability from the frontline to the c-suite
- Documenting and validating proper material usage
- Onboarding subcontractors and third parties with the appropriate project expectations
- Auditing and testing home construction
- Addressing deficiencies immediately and practicing continuous improvement
Build a quality assurance program that works for your company’s unique needs. By getting everyone invested in quality, builders can significantly reduce potential liabilities.
Step #5: Practice Site Safety
According to the Bureau of Labor Statistics, more than 150,000 injuries occur on construction sites every year costing companies more than $11.5 billion. One major injury can financially cripple a company. Developing a site safety program helps mitigate harmful workplace incidents to keep workers—and the business’s bottom line—safe. A few ways to make safety a priority include:
- Making accident prevention part of the daily messaging
- Creating site safety protocols for staff and contractors
- Conducting regular jobsite safety trainings
- Performing preventative maintenance and safety checks on equipment
- Tracking safety incidents and coaching on improvements
- Carrying the right insurance policies for protection
Protected and Profitable with PWSC and PCF Insurance
A little proactive planning can keep big problems from plaguing your builds and budget. Start by talking to PWSC, a PCF business, and your insurance agent to discuss how well your policies have you protected. PWSC can also help with a builder’s warranty that picks up where insurance leaves off. Take advantage of our team of construction experts. With more than 100 years of combined experience, we can help you develop a comprehensive risk management plan that keeps your company covered from start to well beyond finish across every home.
By Lindsay Tingler, PCF Construction Practice Leader
