A few weeks ago, a builder called to get a general liability quote. I asked when his current policy expires. He replied, “oh, I let that policy go a few months ago when my last project was finished.” Are you no longer in business? I asked. “Sure,” he said, “I just don’t need insurance since I’m not building right now.” I was beginning to feel a little uncomfortable. Did you sell your last house then? was my next question. “No,” he innocently replied. Are you trying to sell it? I asked. “Of course, I’ve got open houses every weekend. I had maybe two dozen people walk through just last Sunday,” he said with pride.
As our conversation continued, it slowly emerged that this builder simply didn’t think he had any responsibility to the public during his weekend open house tours. Not only that, but he had also recently gone back to an earlier home buyer to finish a downstairs family room. Yet another past customer had asked about adding a Florida room. Our builder gave an estimate and was waiting to hear back. He admitted he’d “probably” need general liability insurance then to do these small projects, but it was clear he didn’t really see the risks involved. Whether this was due to a desire to control costs, an over-reliance on his subcontractors, or just a lack of understanding as to how general liability insurance works, is hard to say. To this builder’s credit, he allowed me the time to walk through the liability risk potential of each scenario we discussed. It was quite a list.*
- First, the weekend open house tours:
- Until it is sold, the home, finished or not, is the property of the builder and he is liable for bodily injury to any member of the public who sets foot on any part of the property and is injured. This is true whether they are there as invited guests between 1:00 and 4:00 each weekend, or if they stop by unannounced after work on a Tuesday. In fact, if anyone who is not working for the builder gets hurt while on the property, they have a right to file a liability claim and a lawsuit against the builder. Without general liability insurance, the builder is on his own.
- Next, finishing the family room:
- The subcontractor our builder hired to do this small job has his own general liability insurance and the builder has a certificate proving it, issued when the policy renewed about four months ago. Unfortunately, the sub’s policy was recently cancelled for non-payment of premium. While at the home, the subcontractor carelessly drops a cigarette butt that starts a fire causing over $100,000 in damage to the home. The smoke, heat and water damage sustained by the home next door when the fire department put out the blaze isn’t covered either. That’s worth another $215,000. All this damage would have been insured in addition to the cost to defend the builder in the resulting lawsuits, had our builder not canceled his general liability policy when he finished construction.
- Last, but not least, the Florida room:
- The subcontractor has active general liability insurance. Nothing happens during the project. Everyone’s happy. Then, about a year later, during an unusually cold winter, the homeowner starts his gas fireplace for the first time in ages. The fireplace is in the living room that adjoins the new Florida room. Not long after flipping the switch, there is a terrible explosion. The house is a total loss. The homeowner and his wife are dead. It seems the subcontractor had nicked a gas line with a drill during installation of the prefab Florida room. The gas line remained closed until it was time to use the fireplace at which point all it took was a spark provided by the starter in the gas “log.” With such a catastrophic loss, the subcontractor’s policy limit is quickly used up. Our builder’s policy would have provided excess limits because the builder is liable for hiring the subcontractor who nicked the gas line. Since our builder doesn’t have $1,000,000 laying around, he’d lose his business in this scenario.
When I was done with my hypothetical claims scenarios, the builder asked, “what are the odds of any of those things actually happening?” I said, you got me. None of these scenarios is likely to happen to you, but accidents like them have all happened to someone somewhere and they and others like them happen all the time.
Insurance is based on the law of large numbers. If you toss a coin enough times it will come up heads half the time. If you toss it only a few times, there’s little chance of predicting heads or tails. Are you feeling lucky?
(* These are only a very few of the potential risks associated with general liability and are intended merely to illustrate the potential for uninsured losses. For more information, contact us at 866-454-2156, or visit us on the web at https://rwcinsuranceadvantage.com/products/general-liability/)