Wade Sheeler

Builder risk

Coinsurance clause

Water backup

I’m a Senior Product Analyst at Grinnell Mutual. Over my career, I’ve held positions in auditing, research and development, and corporate education and training. I have earned my Chartered Property Casualty Underwriter (CPCU) designation, as well as other insurance and risk management designations.

Outside of work, I serve on Mentoring Advisory Council for the Vaughan Insurance Institute at the University of Iowa and on the board of Leadership Iowa University. I'm also a mentor for Big Brothers/Little Brothers, and volunteer for the Jasper County United Way, Mainstreet Newton, and Meals From the Heartland.

Builder risk

When you make the decision to build a new home, it’s likely one of most important financial decisions you will ever make, so it's important to review exposures.

Before addressing how to approach this risk, you need to review who bears the risk of loss. Is it the contractor or is it the insured? This should be spelled out in the contract between the building contractor and insured. Sometimes the building contractor will retain the exposure until the house is completed and turned over to the owner. At other times, the homeowner will be required to bear the risk of loss.

If your contract requires you, as the homeowner to bear the risk of loss, then you should consider a Builders Risk Coverage endorsement. This endorsement is specifically designed to address the unique exposures of a house under construction.

Grinnell Mutual’s Builders Risk Coverage form adds some valuable additional property coverages:

  1. Collapse of the house under construction is covered if it is caused by water below the surface of the ground. Collapse does not include settling, cracking, shrinking, bulging, or expansion.
  2. Construction materials and supplies for use in construction of the house are covered for overturn or collision if they are in transit to the building site at the time of the accident.

Only those materials or supplies which are being used in the construction are covered. Theft of materials by any person who is authorized to be on the site will not be covered.

This coverage ends either 12 months from the date the coverage begins or the date the dwelling under construction is completed, whichever is earlier.

There are certain eligibility guidelines that apply:

  1. This endorsement is only available for new homes.
  2. The dwelling being constructed must be for the occupancy of the insured.
  3. The dwelling must be insured to 100 percent of the replacement cost of the completed dwelling.
  4. If the value of the home exceeds $1 million, prior approval by the underwriter is required.
  5. The dwelling must be constructed by a contractor. Owner-constructed homes are not eligible.
  6. The contractor or subcontractor can’t be added as an additional insured.
  7. The amount of coverage for Coverage B – Other Structures is limited to 10 percent of the Coverage A (Dwelling) limit.

Please note that the Builders Risk Coverage endorsement is only available for the Home- Guard® Special Form or Home-Guard Comprehensive Form.

If you will be building a new home, contact an agent to make sure your insurance needs are covered for your new home.

Coverages described here are in the most general terms and are subject to actual policy conditions and exclusions. For actual coverage wording, conditions, and exclusions, refer to the policy or contact your independent agent.

Coinsurance clause

You may hear your agent telling you that you need to buy more coverage for your property insurance. What does this mean and why does your agent say this?

Most likely, your agent is concerned about making sure your property is insured to value. When a property is not insured to value, a policy may trigger the coinsurance clause that can be found in the Loss Settlement provisions in the Conditions section of your policy. (This is a concept that applies only to property coverages.)

A coinsurance clause applies only to a policy that includes replacement cost coverage. Replacement cost coverage means the insurer will pay the cost to repair or replace the property subject to the applicable policy limit. There is no deduction for depreciation.

Coinsurance in practice

For example, In Grinnell Mutual’s Home-Guard® Select policy, the coinsurance requirement is 80 percent of replacement cost. In the Home-Guard Comprehensive policy, the coinsurance requirement is 100 percent of replacement cost. If the policy is written for an amount of coverage less than the applicable required percentage of the replacement cost, then a “penalty” will apply at the time of the loss.

Here’s an example to illustrate this concept.

Insured A has a home that would cost $200,000 to replace. The policy the insured purchases has an 80 percent coinsurance clause. Insured A insures this house to $140,000 (70 percent) thinking they will save on the premium. Six months after the policy is written, a fire partially damages the house causing $100,000 in damages.

In order to have received full repair value on this house, the insured should have insured it to 80 percent of its placement cost ($160,000). Since the insured elected to insure it to only 70 percent of its replacement cost ($140,000), they will incur a “penalty” when the loss is settled.

The penalty would be calculated as follows:

$140,000/$160,000 x $100,000 = $87,500 (loss settlement)

The insurance company would pay $87,500 and the insured would be required to pay $12,500 of the repairs. The amount the insured is required to pay is referred to as the “coinsurance penalty.” The policy deductible will be subtracted from what the insurance company pays.

If the insured had insured the property to 80 percent of its replacement cost, they would have received the full amount of the repairs (subject to the applicable limit). Since the insured met the coinsurance requirement, the insured would not be penalized even though the property had not been insured to 100 percent of replacement cost.

Talk with your agent

If your agent suggests that you raise your property limit, listen to the reasons why. They are looking out for your best interests to make sure that you do not suffer a coinsurance penalty at the time of loss.

Coverages described here are in the most general terms and are subject to actual policy conditions and exclusions. For actual coverage wording, conditions and exclusions, refer to the policy or contact your independent agent.

Water backup

In the Midwest many homes have basements. Some have just basic finishes and are primarily used for storage. Others are finished to a level comparable to the upper levels of the home with drywall, carpeting, and woodwork. Homes with finished basements may have finished living areas, bathrooms, laundry rooms, and bedrooms.

Often, insureds think their basements are covered to the extent that the rest of their home is, but this is generally not true. In the property section of a typical homeowners’ policy, number three under the Exclusions section may exclude coverage for water damage. This is usually defined to be flood, surface water, storm surge, mudslide, water below the ground surface pressing on, flowing, or seeping through foundation, basement, door or windows. Also included in the definition of water damage might be “water or water-borne material which backs up or overflows from sewers or drains or which overflows or is discharged from a sump, sump pump, or related equipment.”

Although not every water exposure that a basement may be susceptible to can be addressed, insureds may wish to consider purchasing a Water Backup Through Sewer or Drain endorsement if it’s offered by their carriers.

This optional property endorsement will likely provide coverage for physical loss to your dwelling and personal property, occurring on the insured premises, that is caused by water which backs up through sewers or drains or water which enters into and overflows through sump pumps.

Some or all of the following coverage limitations could apply:

  1. There is no coverage if the loss is caused by the negligence of the insured.
  2. There is no coverage if the loss occurs or is in progress within five days of the effective date of the coverage.
  3. The loss is a result of damage caused by flooding, surface water, or the overflow of a body of water.
  4. The loss occurs within three days before or five days after flood on the insured premises.

At Grinnell Mutual, insureds can purchase up to $50,000 in coverage for this endorsement. A deductible of $500 or the policy deductible (whichever is greater will apply).

If insureds want to purchase more than $25,000 of coverage, a water alarm and flapper valve must be installed. Sump pumps will need to have a battery backup or permanently installed auto-start generator. Any dwellings located in an area that is subject to flooding or high levels of water will not be eligible for this endorsement.

The amount of insurance selected by the insured (up to the endorsement maximum) is the most that will be paid for any one loss and the total of all covered losses occurring during the policy period. The important thing to remember is that this coverage applies only to water or sewage that comes up through the drain or through a sump pump.

This is a valuable and important coverage for homeowners to consider. Please contact your Grinnell Mutual agent to discuss adding this coverage to your homeowners policy.

The summarized coverage descriptions are used for reference only and do not contain relevant policy conditions, exclusions, or limitations. Products and discounts not available to all persons in all states and are subject to underwriting guidelines, review and approval.