October 20, 2023 – The home improvement industry is booming. In recent years, several factors have contributed to increased remodel activity. First, the COVID-19 pandemic caused many people to spend more time than ever in their homes, and remodeling to add workable office space or improve livability was suddenly more popular than ever.
Pandemic costs and complications then contributed to inflation that drove mortgage rates upward. People with 2.875% fixed mortgages had no desire to sell their homes and borrow to buy a new one at 8%. So remodeling seemed more attractive than moving.
Dealing with contractors and minimizing risk can be a full-time job, at least until the remodel is finished. And even when things go well, remodeling is itself an expensive and risky proposition for homeowners. When things go wrong, a worker can be seriously injured, or substantial property damage can happen.
This article highlights a few remodel contract provisions that typically go unnoticed but can limit or impact insurance coverage and be critically important if something goes wrong during the remodel. A little advance planning can make unwanted surprises less likely and more manageable.
Imagine a scenario where homeowners hire a contractor to perform a large remodel on their property. Before work starts, the owners review and sign the contract (which is provided by the contractor and has boilerplate language including an insurance provision). A few weeks into the project something goes terribly wrong — a pipe must have been broken during excavation and now the owners’ yard and pool house are sliding into the neighbor’s suddenly drenched backyard.
The contractor’s liability insurance should cover the damage, right? It depends.
There is a chance the homeowner’s own insurance may apply; or worse, the homeowner is personally on the hook. Who pays, and whether it is covered by insurance, may depend both on exactly what happened and what the remodel contract says.
Example contract language
Let’s start with a scenario where the Contract is presented as a “standard form” agreement with the following provisions:
3.1. The Contractor shall maintain general liability insurance for any injuries related to the Work. Contractor shall include the Owner as an additional insured for claims or damages caused by the act or omissions of the Contractor.
3.2. The Owner shall purchase and maintain adequate insurance to cover all Work.
3.3. The Owner and Contractor waive all rights against each other for damages caused by fire or other perils to the extent covered by other insurance applicable to the Work.
After the property damage occurred to the homeowner’s house, the owner makes a claim with the Contractor’s general liability insurance. General Liability insurance typically covers bodily injury or property damage caused by an accident.
However, in this scenario, the Contractor named the homeowner as an additional insured. The General Liability policy may exclude property damage to property owned by an insured. Accordingly, the Contractor’s insurer could deny coverage. If the neighbor sues for the damage to their yard, the owned property exclusion would not apply; so that’s at least some consolation.
The homeowners may want to sue the Contractor for negligence. However, if the owner’s own insurance covers the damage to the yard and pool house, section 3.3 in the contract could take away the owners’ (and the owners’ insurer’s) right to sue the contractor. In the 1994 case, Lloyd’s Underwriters v. Craig & Rush, Inc., a California appellate court interpreted similar contract language as waiving the owner’s right to sue the contractor.
The homeowners are left with no choice but to make a claim with their own homeowners insurance to cover the damages. Even if full property insurance coverage is available, (and this particular scenario raises possible exclusions, such as earth movement), this approach could force the homeowners to pay the deductible and potentially face higher future premiums or difficulty staying insured.
Like the Contractor’s general liability insurance, the homeowners’ own liability insurance will probably exclude damage to property owned by an insured (and the homeowners really did nothing to cause the damage anyway). This may mean that only the neighbor’s damage is covered.
To make matters worse, a contractor could argue that the homeowner breached the contract (provision 3.2) by failing to maintain proper insurance that adequately covered risks arising from the work.
What happens if the contract says nothing about insurance? What if the contract reads as follows:
3.1 Owner shall hold harmless and indemnify Contractor against all claims arising out of Contractor’s work. Contractor is not responsible for any injury to persons or damage to property.
In this scenario, there is no contractual duty for the Contractor to get any insurance. This agreement also appears to shift the risk of loss to the homeowners, making it more important than ever for the homeowners to have adequate insurance of their own. When something goes wrong in this scenario, the homeowners are likely to learn that they have no right to sue the contractor (which may not be adequately insured anyway).
What about subcontractors?
Something to consider when hiring a contractor is whether they will be hiring subcontractors to perform all or some of the work. This may impact the application of any insurance the parties obtain. A contractor may also forget to verify that these subcontractors are adequately insured.
A contractual provision relating to subcontractors may read as follows:
3.4 Contractor may subcontract portions of this work to properly licensed and qualified subcontractors, who will be solely responsible for all aspects of the subcontracted work and any resulting loss or damage.
This provision does not address insurance coverage. In the event of an injury or damage, the parties will be left to point the finger at each other, and their liability insurers may do the same thing. What a mess!
How can you protect yourself?
The first line of defense to avoid these unwanted surprises is to select properly licensed, qualified and insured contractors. Spot issues in the contract which may subject a homeowner to liability down the road.
At the very minimum, homeowners need to understand the responsibilities they are agreeing to undertake when signing these agreements. This may include purchasing additional insurance solely for the project (such as builder’s risk insurance.).
Before starting a large remodel project, homeowners may want to consult with an insurance broker to understand the insurance coverage that is available and needed for the particular remodel project. If the budget allows, consultation with an experienced attorney might also help spot and remedy potential problems in advance.
Another way to protect yourself is to confirm the licensed contractor uses only licensed subcontractors, and actually has the insurance promised. Requesting a copy of the Contractor’s liability and workers’ compensation insurance policies, rather than merely accepting a certificate of insurance (typically a short one-page high level and very partial summary of insurance), can help eliminate surprises.
A major remodel can be a very exciting thing for homeowners. But the risks that can attach are considerable. Be aware; plan ahead; read the contract; and consult with appropriate professionals.