Why You Need Construction Insurance
Here’s a risky way to save money building a modular home. Select a modular dealer and contractors who are not properly insured.
Imagine that a neighbor’s child is seriously hurt when he falls into your cellar hole before your modules are set on the foundation. Imagine that one of the trucks delivering your modules strikes your neighbor’s car causing serious damage. What if the crane company drops one of your modules rendering it unusable? What if a member of the set crew is seriously injured or killed when he falls from your roof? Or what if the plumber fails to securely connect a pipe, which causes severe water damage before the leak is discovered?
Accidents and mistakes can happen when building a home, regardless of the type of construction. Since the right insurance can mitigate the damages, you need to ensure you’re thoroughly covered.
Require Everyone to Obtain Construction Insurance
This is best done by requiring everyone involved in building your home to have insurance. (Here’s a previous blog that elaborates on the insurance you need.) Making this a requirement won’t prevent disagreements about who is responsible for coverage, but it will increase the likelihood that one or more of the insurers will take on this responsibility, which is a lot better than you being saddled with the liability.
Verify Construction Insurance Coverage
Making insurance a requirement, however, isn’t enough. You need to verify that each party has a current policy with sufficient coverage. To do this you need to insist on receiving a “certificate of insurance” directly from each party’s insurance agent. Getting a copy of the certificate directly from the insurance agent will protect you against being duped by a dealer or contractor whose policy has run out, since it is not difficult for someone to doctor a photocopy of an expired certificate. You might be surprised how often this happens, mostly because builder insurance is expensive. There will be no sympathy from the insurance company, however, if you file a claim against a policy that was not renewed. After receiving the certificates, you should ask your own agent to review the coverage. They should be able to determine if the coverage includes sufficient liability insurance and workers compensation insurance.
Secure Your Own Construction Insurance
Since you need to have coverage from everyone working directly on your project, you also need to follow the same procedure with any subcontractors you directly hire. In addition, you should obtain either a “builder’s risk” policy or its equivalent for yourself, since this will provide better coverage against theft and vandalism than an ordinary homeowner’s policy.
For more information about modular home construction insurance during its construction, see Selecting a Modular Home Dealer, Selecting a General Contractor, and Financing a Modular Home in my book The Modular Home.
Oral Representations Often Lead to Disagreements
Now that Daylight Saving Time has arrived and spring is two weeks away, many customers are ready to start building their home. Other customers are getting ready to select their modular builder. With interest rates predicted to rise by June and housing starts to increase to their highest level in several years, getting started soon is a wise move. Here is some advice about ensuring that your modular home contract includes what you expect.
Experienced modular builders have lots of stories to tell about the types of problems that cause disagreements with their homebuyers. One type of problem involves misunderstandings about items that were never discussed or documented because one party just assumed what the other party intended. Another type of problem involves misunderstandings about things that were discussed but not included in the builder’s contract. It might surprise you that more frustration, anger, and stress are generated by issues that were actually discussed – but not documented in writing – than by those that were not discussed.
These situations typically involve complaints by the homebuyers such as, “I told you I wanted raised panel maple kitchen cabinets and not picture frame maple cabinets.” The builder might come back with, “Don’t you remember, we did talk about your preference for raised panel maple cabinets, but the additional cost put you over your budget.” The problem is that the modular builder and homebuyers had talked about this on two occasions, going back and forth about which would be included, but the final contract just said “maple kitchen cabinets” and now both parties remember the discussion differently.
The Cost of Relying on Oral Representations
The cost difference between the picture frame and raised panel maple cabinets would be substantial enough on its own. But usually this misunderstanding doesn’t get discovered until the cabinets are already purchased and at least partially installed. It will cost either the homebuyer or builder (or both) a bit of money to make the change. The alternative is no better. If the homebuyers accept the picture frame cabinets, they will likely be unhappy with their modular builder and forever disappointed in their kitchen. The relationship between the two parties will now be fractured by distrust, which will make it more likely that small disagreements will become antagonistic.
Agree to Make Oral Representations Null and Void
The last thing you want to do is to rely on your modular builder’s or your own memory of what you’re getting. That’s why it is better for modular builders to include a clause in their contract that states that “It is mutually agreed that any oral representation made by either party prior to the signing of this agreement is null and void.” This clause serves to limit and place boundaries around the scope of either party’s representations and warranties. Even if an item is discussed and agreed to verbally, it has no legal validity unless it’s documented in the contract.
Replace Oral Representations with Detailed Written Representations
My suggestion is that you share responsibility with your modular builder for documenting all the details by taking notes during your meetings. You should be concerned if your builder is not also taking notes. If you then compare your notes with the builder’s contract, you are more likely to avoid contentious and costly disagreements.
Six Clauses in Your Modular Home Contract
Here are six clauses you may see in your modular home contract. Their purpose is to document standard construction industry practices that you, as the Homeowner, might not know. When put in writing, they help eliminate potential areas of disagreement between you and your modular builder.
Modular Home Contract: Changes, Deviations, or Omissions
This clause states that you agree to accept the minor deviations that sometimes incur in construction as long as the work is substantially the same as described in the contract and within accepted industry tolerance. Many builders don’t include this clause because the types of changes covered are usually so minor that you are unlikely to notice them. The reason this clause is sometimes included is that a few homebuyers have been known to get very upset when there is a change of ¼” in the size of a bedroom.
The builder may also include a similar clause that refers specifically to materials and products. Building code requirements, product availability, and design improvements may compel the builder to substitute material similar in pattern, design and quality to that listed in the plans and specifications. When possible, the builder should consult the customer when this occurs.
Modular Home Contract: Access to Your Property
As the Homeowner, you will at all times have access to your property and the right to inspect the work. However, if you enter the property or invite others to enter the property during the course of construction, you all do so at your own risk.
Although your access to the property is ensured, this clause points out that you cannot interfere with the work or the modular builder, his employees, or trade contractors. In addition, you will need to communicate directly with the supervisor assigned to your project rather than other employees or contractors on the site.
Modular Home Contract: Work Performed by the Homeowners and Their Trade Contractors
This clause speaks to your responsibilities when you perform some of the work or directly hire contractors other than your builder to complete some of the work. In that case, you are responsible for ensuring that you and your contractors have liability and workers compensation insurance. You will also be responsible for coordinating this work to avoid disrupting or interfering with the work being done by the builder’s team. Needless to say, you are responsible for the quality of this work as well as whether it complies with the building code. In addition, you will need to take care of any warranty work.
Modular Home Contract: Unused Materials
Builders often have unused materials after they complete their work. Sometimes this is intended, since it’s easier to return the excess than to leave the job in the middle of the work to fetch what’s missing. Keep in mind that you have only paid for the materials your builder has used. This clause states that the builder owns these unused materials. However, most builders will leave you some extra siding, shingles, paint, as well as some other materials, if they have them.
Modular Home Contract: Signage and Marketing
Most modular builders will want permission to display a sign on your site until their work is completed. They will also want permission to invite their prospective customers to walk through your home while it is under construction. This clause will allow the builder to do these things, but it should also state that prospective customers visit at their own risk.
Modular Home Contract: Building Code Compliance
Your modular dealer is responsible for ordering the home so that it complies with the state building code current at the time your agreement is written. Modular manufacturers are required to build their homes in compliance with the code in effect at the time they build your home. This clause states that when changes happen to the state code, you are responsible for the additional material, labor, services, and other expenses required to comply with the changes. It also states that you are responsible for the costs associated with complying with local building codes when these codes exceed the state code.
There are many things to learn the first time you build a modular home. But if you’re like most homebuyers, you won’t get the full benefit of what you learn, since you’ll likely only build one home.
But you can benefit from what I’ve learned over twenty-eight years building more than 1,200 homes. To start with you can read my book, The Modular Home, which gathers all this information in one place.
Take Advantage of My Experience by Using My Modular Home Checklists
Of course, it’s hard to use a book efficiently the first time you use the information. That’s why I’ve created several checklists that cover the most important steps. Below is a link to each of the checklists. There’s also a link to this list on the home page of The Home Store’s website. I hope you find these modular home checklists helpful.
- Ensure You Are Ready Willing and Able to Build a Modular Home
- Selecting a Modular Home Dealer
- Your Modular Home Dealer Customer References
- Selecting a Modular Home General Contractor
- Your Modular Home General Contractor References
- What to Include in Your Modular Home Legalese
- Selecting the Right Modular Home Plan
- What You Should Ask Modular Home General Contractors
- Reviewing Your Modular Home Floor Plans
- Reviewing Your Modular Home Elevation Plans
- Modular Additions
- Building a Universal Design Modular Home
- What Your Modular Manufacturer Needs from Your Contractor
- How to Air Seal a Modular Home
- Making an Offer To Purchase for a Building Lot
- Your Municipal Water and Sewer Connections
- Reviewing Your Modular Construction Drawings
- Potential Permits and Supporting Documents
- Your Modular Dealer and Financing Tasks
- Your Permit and General Contracting Tasks
- Omitting Materials from the Modular Manufacturer
For more information about all the topics covered in the checklists, see my book The Modular Home.
Modular Home Insurance
When building a modular home you need insurance coverage for five parts of the project:
- The delivery of the modules
- The set of the modules on your foundation
- The work done to your land before and after the modular delivery (tree clearing, excavation, foundation, etc.)
- The work done to complete the “button-up” of your modules after the set
- The completed home after you receive a certificate of occupancy from the building department
Most of this coverage should come from the companies that are completing each step. The delivery and set of the modules, including the crane, should be insured by the modular manufacturer and/or modular dealer. To ensure your modular home insurance is in place, you need to ask each modular dealer you are considering to have their insurance company mail you an insurance binder. It is best to receive it directly from the insurance company, since it is fairly easy to fake the forms. Make sure the coverage includes sufficient liability insurance and workers’ compensation; ask your insurance agent for the recommended amounts. This will limit your potential liability if the dealer or one of his subcontractors is not fully insured and something goes wrong during the set, such as an accident causing a serious personal injury or significant property damage to your home.
You need to follow the same procedure with your general contractor (GC) and any subcontractors you directly hire to complete the work to your property and the button-up of the modules. Secure a certificate of insurance from each of your contractor candidates before making your final selection. Ask your own agent to review the coverage.
You should also insist that your contracts with your modular dealer and contractors state what modular home insurance coverage each of you is obligated to provide. You should accept responsibility for obtaining a builder’s risk policy or its equivalent. The contractors should accept responsibility for providing general liability insurance and, if they have employees, workers’ compensation.
Modular Home Insurance with a Builder’s Risk Policy
The advantage of a builder’s risk policy over a typical homeowner’s policy for your own modular home insurance is that it automatically provides coverage for theft of building materials and supplies as well as vandalism. You should direct your insurance agent to provide this additional coverage even if you opt for a homeowner’s policy. Since your personal circumstances may differ and your agent may offer other alternatives, consult with your agent.
Modular Home Insurance and Lender Financing
If you are paying for the modules with funds from a lender, which means you are paying by the assignment-of-funds method, your lender will require you to have your modular home insurance in place when you close on the loan. If you are financing your home with your own funds, have coverage in place before your GC begins any work.
If your lender is paying for the modules after the set, the dealer’s insurance should be responsible while the modules are parked on your property before the set, since you will not yet own them. If the dealer does not provide coverage, you should direct your insurance agent to provide it. If you are using private funds to pay for the modules upon delivery, your insurance should provide coverage when the modules are parked on your property, since you will already own the units. You should verify this. Your insurance is less likely to provide coverage when the modules are stored away from your property in a staging area. If you cannot obtain coverage for your situation, ask the dealer for help.
Instruct your insurance company to mail or fax your modular dealer a certificate of your modular home insurance a few weeks before the scheduled delivery. This proves that you have the necessary coverage. The effective date should be set at least 48 hours before the scheduled delivery date and remain in place for at least a week. The certificate should state, “[Dealer’s company name] is loss payee as interest may arise.” The certificate protects the dealer and manufacturer should your modules suffer damage after they are set on the foundation but before your lender pays the dealer. This might happen, for example, if lightning were to strike the modules the first night of a two-day set. Should this unlikely event occur, the certificate ensures that your insurance company would compensate the dealer so he can pay the manufacturer. Once the dealer is paid for the house, he no longer has any insurable interest, so your insurance coverage reverts to you and your lender. The manufacturer’s insurance should cover the modules while they are being delivered to the site. The dealer’s and crane company’s insurance should cover the modules while they are being lifted onto the foundation.
Modular Home Insurance for Personal Property During Under Construction
Do not move any of your belongings into your home before your GC finishes his work without his permission. If the GC agrees, he will ask you to use those rooms he has finished. If you intend to store your things in the basement, he must have already completed all of his work there. Since you are responsible for theft or damage, ask your insurance agent about your coverage.
Modular Home Insurance Costs Less
Modular home insurance during construction will save money compared to insuring a site-built home due to the shorter construction time. The shorter construction period also lessens your exposure to the typical risks that attend construction sites, such as vandalism and the pilferage of construction materials. Vandalism is further curtailed because the modules can be secured more rapidly than a site-built home. The ability to quickly secure the modules also makes it more difficult for someone to steal construction materials. Pilferage is further reduced because of the size of the modules; you cannot walk off with a module in the way you can carry away a few boards of lumber. Completing the home more quickly also reduces your biggest financial risk, that of a personal injury to a contractor working on the job or a neighborhood child playing around the home after hours.
For more information about modular home insurance during its construction, see Selecting a Modular Home Dealer, Selecting a General Contractor, and Financing a Modular Home in my book The Modular Home.