Risk Management Considerations for Estate Renovation Projects
Many property owners look forward to expanding or remodeling their home as a chance to improve their lifestyle and make a home truly theirs after purchasing it from someone else. But, too often the renovation project can become more arduous, expensive, or risky than necessary – especially for owners considering work to an estate or large, custom-built home. Failure to proactively implement a robust risk management strategy may leave the owners exposed to uninsured property loss, liability lawsuits and even family safety threats.
These risks range from the abandonment of projects partway through by contractors experiencing financial problems, to kidnapping and extortion schemes perpetrated by workers with unknown criminal pasts. Other perils include the theft of building materials or valuable home contents during the construction phases, damage to the property caused by fire or weather, health issues deriving from the dust and other airborne particles caused by sanding, sawing, and plastering, and the vulnerability of family members’ personally identifiable information to a data breach.
Numerous examples abound of contractors who failed to carry enough liability insurance, putting the homeowner on the hook for the cost of construction defects, among other dire exposures.
We will focus on actionable risk mitigation steps to take before construction begins.
Contract and Subcontractor Hiring
A successful project begins with hiring the appropriate team of contractors, architects, and other design professionals. While most contractors and subcontractors' are highly reputable organizations, modest capital needs and minimal licensing and registration requirements – in most municipalities – make it simple to form accompany. Unreliable contractors will often close a business that earned a bad reputation and open another under a new name. Or, if their license has been suspended, they may use someone else’s.
Traveler contractors who may be posing as experts inpainting, roofing, dry wall and other remodeling tasks – pose a particular concern. Often, such individuals will appear professional and present what appears to be a great deal. However, they will typically use defective materials that require rebuilding, then seek to change the terms of the arrangement.
In one case, a family hired a contractor to build a tennis court on their property. The contractor failed to secure the proper permits, and a worker was severely injured while trying to pave the soil with heavy equipment. The contractor was unlicensed and had no experience building a similar structure.
The situation created when contractors go bankrupt or simply abandon a job can led to more than aggravation and monetary loss. In one instance, a family with young children at home found themselves answering the door at night to a parade of angry subcontractors who had never been paid by the contractor.
With so much riding on the choice of contractor, homeowners must use a variety of methods to find a qualified and reliable one. On large projects, many owners typically hire an architect before retaining a general contractor and will rely partly on the architect’s knowledge to build a list of contractor candidates and guide there view process.
In addition, Howard Insurance has vetted several firms with specialized expertise in the contractor evaluation and selection process. These firms have depth of knowledge and experience across every stage of the renovation life cycle.
The Importance of Comprehensive Background Checks
Before formally hiring a contractor, it is imperative to conduct professional background screening for all contractors, subcontractors, and crew. More than just the professional integrity of these individuals needs to be examined, since they will often be able to learn the daily routines of the family, become privy to alarm access codes, and perhaps learn of valuable items in the family’s possession.
An owner should never just accept a contractor’s word that the subcontracted workers have been screened for past criminal behavior. It is imperative to ask who did the screening, then research the company. There are many unscrupulous background checking firms that do a superficial job for a hundred dollars.
Although the homeowner will likely have to bear the cost for comprehensive background checks, every single worker should undergo professional screening. The owner must know the background of everyone that sets foot on the property. This point cannot be overemphasized. In one case of a large, extensive project, the property owner screened the backgrounds of the proposed staff and crew and found that 30 percent had issues, including some with arrests for violent crime, cocaine distribution, and use of false identification.
Considering the risk to family members – and the legal obligation to domestic employees – this step will help to protect their safety and well-being.
Assuring Worksite Safety
Assuring worksite safety for the family, crew and home is another key consideration. In situation where family members will continue to live at the residence during construction, the risk of physical harm and kidnapping and extortion schemes is present. In addition to the background checks, family members should restrict any conversation to the general contractor and superintendent only, and – ensure that work hours are at times when children are less likely to be on the premises, such as during school.
And flammable items demand special attention. At the end of each workday, contractors and subcontractors need to store all flammable liquids (like paints, varnishes, and adhesives) in UL-approved storage facilities located safe distance away from the premises.
All construction areas should be sealed off from the rest of the house to limit noise, dust and other potential toxins from entering living spaces. Older homes, for instance, may have asbestos or lead-based risks. It is also encouraged to use a double curtain of polyethylene plastic sheeting to contain these elements, rather than the customary single sheet.
Weather presents a persistent threat to the home, as the envelope of the house will frequently be open during the construction process. Furnishings and other contents that have not been moved into storage can be destroyed and the architectural integrity of the home compromised. Tarpaulins must be always on hand and the house envelope wrapped at the end of each workday.
Contractual Considerations
To help ensure the renovation goes smoothly, a legal contract must account for every aspect of the project. Many contractors will provide the client a copy of the American Institute of Architects (AIA) contract, which is written in favor of the architect, contractor and others working on the project – and not the property owner. Owners should send the contract to their legal and insurance advisors, to make sure their interests are protected.
A comprehensive contract should spell out the responsibilities of all parties and the scope of their work, in addition to the materials that will be used and their respective costs. The terms of payment, sales tax, permit fees, warranties, start-and-end dates, change-order processes, final review and sign-off procedures and the removal of debris are other elements of a carefully constructed contractor agreement. Cost overruns should also be addressed, as the workload almost always changes.
Importantly, property owners should be extremely wary of any inclusion of language that states they will hold the contractor harmless for damages that arise in connection with the project.
Securing and Confirming Proper Insurance
Considering the risky and unpredictable nature of a major home renovation, the insurance advisor must be involved during the planning stages to review the breadth and quality of the contractor’s and subcontractor’s insurance policies, as well as the owner’s exiting insurance policies.
Workers Compensation: Contractors and subcontractors should have workers compensation insurance, which absorbs the cost of injuries or illnesses occurring to employees during their work. But not all do. While some states require that all employers provide workers compensation coverage, many limit the requirement to companies with more than 10 or with more than 25 employees. For this reason, the owner should verify that workers compensation covers everyone involved with the job.
Commercial General Liability: Commercial general liability (CGL) insurance protects the contractor against third party liability claims and property loss arising out of the contractor’s negligence. The liability limit should at least match the value of the home and contents. Bodily injury risks presented by curious neighbors or delivery company personnel who venture onto the construction site are covered under the contractor’s CGL policy, as are the theft of or damage to valuable art, jewelry, and other valuable items.
Personal Insurance Considerations
While contractors and subcontractors should have all the necessary insurance in place to indemnify the homeowner against any property or liability risks associated with the renovation, the personal insurance program of the owner should also be reviewed.
Builders Risk: Most importantly, the owner should work with their insurance advisor to assess the need for a builder's risk policy, or endorsement to the existing homeowner's policy. Due the high risk of property loss and bodily injury associated with home renovations, insurance companies typically restrict coverage when the cost of the home renovation exceeds a certain percentage of the home’s insured value, or when the family will live elsewhere during construction for a certain period of time, such as 30 days. For instance, coverage for the home and contents could be reduced or modified. The amount of coverage for the home structure might be capped at an amount below the value of the home listed in the policy. Deductible amounts might be increased, and coverage for theft might be excluded. By notifying the insurance company and purchasing builder’s risk coverage, the owner allows an insurance carrier to charge adequately for the increased risk and to help confirm proper safety procedures are in place for the builder.
Home and other Structures: Planning for the renovation should also include a general review of coverage needs beyond builder’s risk. Property owners should not wait until after the renovation to increase the coverage limit on the home structure. If the improvements include new walkways, driveway, fences, swimming pools or other structures – the appropriate insurance limits should also be adjusted.
Umbrella Liability: Although the insurance held by the contractor and subcontractors should address any liability risk associated with the project, it is prudent to review the liability limits for the property owner – in the event they are named in a lawsuit.
Lastly, when a home is already under construction – this is an opportune time to install new safety systems. With contractors already on site, and the walls open – the incremental cost of installation may never again be so reasonable. In addition to burglar and fire alarms, which tend to be customary in most high-value residences, other devices worth considering include:
· Water and gas leak detection systems that automatically detect leaks and shut off the main supply
· Standy generators that run on natural gas or propane and automatically start when the utility power fails
· Temperature and humidity monitoring systems tied to a central alarm
· Battery power and backup for sump pumps
· Lightning protection systems
· Seismic shut-off valves
· Ember-resistant venting
Digital Security Considerations
With much of the focus on the tangible portion of aconstruction project, an overlooked component is the risk to the family from adata breach or cyber attack. The familyshould maintain best practices to secure their digital footprint, includingusing strong passwords to protect all devices. Further, allowing on-site workers to use the main network can expose anyconnected devices to threats like data breaches and the spread of malware. The owner should establish guest Wi-Finet works to protect the main network and ensure any cyberthreats introduced by the staff does not disrupt the main connection.
Conclusion
As clearly illustrated, the pride a property-owner takes in improving their home must be coupled with an understanding of the risks that arise before, during and after construction. It is critical to proactively implement robust strategies to reduce the prospect of financial loss and physic
