An enjoyable diversion in our day is "surfing" the Internet, reading interesting sites on the Web. One of the more interesting is an "urban legends" page, recounting stories which we have all heard so often, that it is accepted as true. The oft-repeated story about the rat found in the fried chicken in a famous fast food franchise- everyone swears it happened in their town- but the story is over twenty years old and false.
There are seemingly just as many myths regarding insurance. For the property owner pursuing a major remodel, repair or reconstruction project, these urban legends can be quite harmful if believed.
1. Builders and contractors are all insured, and have to be insured to build buildings
Unfortunately, this is simply not true. A contractor is required by most municipalities only to show proof of workers compensation insurance. This compensates only for injury to the builder's employees.
2. Contractors have a state-required insurance policy in force
Contractors are required by the Business and Professions Code to have a license bond. This bond is maintained by contractors to compensate the victims of any violations of the Contractors Licensing Laws. For many years, the bond amount was $5,000. However, the amount of the bond was substantially increased a few years ago ... to the sum of $7,500- less than the cost of building a medium-sized brick patio.Contractor license bonds permit recovery to claimants who demonstrate a contractor has violated one of the licensing laws. Unfortunately, incompetent construction is not a violation of the licensing law, and so the bond will not pay for the repairs to correct it.
3. The contractor's insurance will finish the job and pay the subcontractors if they are not paid by the contractor.
Liability insurance issued to contractors does not cover breaches of contract, but only covers negligence. If a customer desires to insure the completion of a project, a "performance bond" is needed; for insurance against mechanics liens, and against non-payment of subcontractors and building material suppliers, a "payment bond". These two bonds are typically sold in a package, and are usually not available from the liability insurance companies. Such bonds add 2-3% to the cost of a contractor's work. Many contractors cannot qualify to be bonded- another good reason to insist upon a bond, if finances permit.
4. Insurance covers all negligent construction work.
Liability insurance typically covers only negligent construction which, during the policy period, results in damage to the building. If the negligent work has not yet resulted in any damage to the property, the insurance policy does not deem it to be an insured event.Furthermore, the insurance normally excludes damage to the insured contractor's own construction work. Under the "work product exclusion", there must be damage to some part of the building other than that constructed by the negligent contractor. So, the insurance company for the roofer does not pay because there is a hole left in the roof, but pays because that hole damaged the drywall underneath the roof.
5. We had our contractor show proof of coverage when we had the construction three years ago, so we are covered now if anything goes wrong
Contractors are usually issued insurance which covers the occurrence of loss during the policy period. As mentioned above, the loss is not the negligent construction, but the damage it caused. Therefore, the policy in force during the construction project is not the policy which typically pays for damage caused by negligent construction. If the contractor's insurance coverage has expired prior to the time the construction caused noticeable damage, there may be no coverage on the policy which was thought at the time of the construction project to protect the property owner.
If the damage is continuing and progressive over time, several years of insurance may all be triggered, essentially multiplying the insurance coverage of a claim. For example, three years of leakage may be covered by insurance policies in each of those three years. But the key is the existence of a manifestation of property damage.
6. A property owner or manager can agree with a contractor to waive the deductible on an insurance repair job.
A marketing ploy among some unscrupulous repair contractors seeking to perform insurance repairs is to offer to reduce the property owner's cost by waiving the deductible. Most insurance policies have a deductible which requires the insured to pay for the first part of an insured loss. Earthquake coverage policies usually charge 10%. A side agreement in which the contractor agrees not to bill the owner for the deductible is defrauding the insurance company. The insurance policy is a contract, and such an arrangement could well void the insurance, and expose the owner or others (including the contractor) to liability for fraud.
7. If the owner does not collect from the original builder for the badly built roof, the owner's property insurance will pay for the repair.
Almost all insurance policies covering property have a construction defect exclusion, in which the insurance company states that it will not cover damage caused by construction defects.
8. The way to pursue a reconstruction claim on the property owner's own insurance is to obtain as large a check as possible.
It is often difficult to determine the construction cost of a repair job until work actually starts. In a pre-repair fight over the amount of an insurance payment, everyone may lose. The owner may incur substantial attorney fees and expert costs in a fight to predict the repair cost in advance. At the end of that struggle, the insurance company will insist upon a final release, and the owner will have to take the risk of surprise cost overruns- which otherwise would have been paid by the insurance. Sometimes, the insured is far better off with an ongoing reconstruction claim, in which the cost is paid by the carrier.
9. Mold damage is not covered by insurance
Since the explosion of mold damage claims in recent years, insurance companies have all written mold damage out of property coverage. This has become so much the rule that many property owners and managers no longer even try. However, mold damage is often accompanied by a litigation threat, or may be caused by someone's negligence (in which case a litigation threat should be made). Threatened litigation is handled by a liability adjuster under the property owner's general liability coverage, which is usually different than the ones who handle property damage claims. In insurance parlance, first party mold claims are not covered, while third party usually are. The point here is that there is often hope for coverage, which otherwise is often overlooked.
Urban legends are entertaining, but not in the insurance realm.