Coverage Corner

HOME RENOVATION PROJECT? INSURANCE CONCERNS & THE ‘RANDO RENO’ GUY

By Kevin C. Amrhein, CIC

“If I ever have to quarantine at home again, then doggone it, I’m going to do it with my dream bathroom!” Since COVID, millions of people, stuck in their homes for longer than they ever dreamed possible, took note of their surroundings, made lists, and fueled a nationwide explosion of home renovation projects.

Your insured – I’ll call him ‘Kevin’ – is ready for the big bathroom renovation and wisely decides against doing any of it himself. He now has two options: 1) hire a licensed contractor, request proof of insurance, and receive a written warranty of work or 2) hire the cheapest guy out there who is unlicensed, has no insurance, and offers no warranty.

Which option do you think he’ll choose?

OPTION 2? REALLY? OH, FOR CRYIN’ OUT LOUD, KEVIN

Kevin pays a random guy to reno the bathroom, which requires the removal and installation of plumbing and electrical fixtures, floor coverings, and wall coverings. The job is completed, Kevin pays the ‘rando reno’ guy cash, and the problems begin. After experiencing damaging leaks and dysfunctional electrical, Kevin has the work inspected. It’s determined that all work was improperly performed and must be torn out and replaced. Kevin tracks down ‘rando reno’ guy who says he has no insurance, no money, and can’t fix the problem. Since he spent his savings on the project, Kevin’s broke and unable to fund the needed repairs.

Kevin files a claim with his homeowner’s insurer.

IS THE DAMAGE INSURABLE UNDER AN ISO HO POLICY?

To summarize: among other things, the policy excludes loss to property described in Coverages A and B caused by “faulty, inadequate or defective … design, specifications, workmanship, repair, construction, renovation, remodeling…”

There’s an important exception worth noting: “However, any ensuing loss to such property described in Coverages A and B not precluded by any other provision in this policy is covered.” Thus, the adjuster affirms coverage, subject to the deductible, for portions of the wall and floor damaged by the leak, as well as the cost to tear out the leaking pipe. He also affirms that nothing else is covered, leaving Kevin to figure out how he’ll come up with the cash to cover the cost of removing and replacing the remaining defective plumbing fixtures, electrical fixtures, floor, and wall coverings.

IF KEVIN WENT WITH OPTION 1, ALL IS WELL … RIGHT?

Sometimes, even reputable contractors are responsible for faulty workmanship. In a perfect world, the written warranty will kick in. In the event it doesn’t (validity issues, limited reimbursement, etc.), the contractor may look to his GL policy for help.

Assuming the contractor has an unendorsed ISO CGL, a review of that policy’s exclusions could make finding coverage for Kevin’s loss difficult. Based on the nature of this project, the CGL adjuster likely would cite exclusion l – Damage To Your Work – as justification for denial.

In summary, absent any compensation volunteered by the contractor or recovered via legal recourse, Kevin is left with the limitations in his HO policy discussed previously.

SO...WHAT SHOULD THE INSURED DO?

Always, always, always go with option 1. There’s no substitute for a written, enforceable warranty of work. Further, while a GL policy may be limited regarding damages resulting from faulty workmanship, some damage caused – such as that to property not considered the contractor’s work, caused by actions of another party (e.g. subcontractor) or caused to the homeowner’s personal property – may be covered.

TAKEAWAYS FOR THE AGENT

You simply cannot remind your insureds often enough: Only hire a licensed, insured contractor and verify such.

Advise insureds to inquire about a warranty including information regarding how it is funded. The insured should be skeptical of any “guarantee” or anything offered by the contractor that isn’t specifically referred to as a warranty. Note – for certain projects, some states may have rules regarding warranties of work. For example, a limited warranty may be mandatory but subject to waiver, mandatory only for a licensed contractor, or other rules. For information, the insured may wish to contact the appropriate state regulatory agency.

Advise insureds to tell the contractor of the intention to have work inspected by an independent party for compliance and integrity assurance.

Advise insureds that they should not rely upon a homeowner’s insurance policy to adequately cover any costs resulting from faulty workmanship.

That’s all for now. Until the next round … cheers!

Kevin C Amrhein, CIC, is IA&B‘s education consultant. He works with our CISR and CIC programs, as well as our special topic seminars and live webinars. Catch him at one of our upcoming professional training offerings: IABforME.com/education.