Housing and You…The contractor should put up some cash insurance

Sep 15, 2013 News

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By Leonard Gildarie
Last week, we spoke of some kind of mechanisms to be established that will place responsibility squarely on the contractor’s shoulders to deliver quality work, on time.
After talking to a prominent insurance company, I learnt that there is a policy called Contractors’ All Risk Insurance that may offer a way out, placing a financial burden on the contractor that if they don’t deliver, it will be felt deep down in their pockets.
That article sparked quite a number of calls from readers and from at least two insurance companies.
The whole idea, I want to repeat, is to examine a new way of thinking to ensure full protection for the homeowner, who is investing his/her life savings into the biggest project or may have applied to the bank and went through the ordeal of securing the paperwork, paying the fees, and running around for mortgage financing.
However, it was pointed out that the Contractors’ All Risk does not cover bad workmanship but is mainly for injuries to workers. It would protect the homeowner and the contractor from the likelihood of being sued by an injured worker or the family of someone who may have died because of an accident at the worksite.
Generally, there is a mutual feeling in the insurance and other knowledgeable institutions that something more needs to be done about the arrangements between a homeowner and the contractor. There has not been much attention paid to this area, yet it is creating major headaches.
I have railed about the uselessness of a signed agreement between the contractor and the homeowner which, because of the court system and the scant regard held for these contracts, would not serve as a deterrent for preventing bad work.
According to Bish Panday, of P&P Insurance Brokers, perhaps the best option available that can force contractors to toe the line is what is known as a performance bond. This is simply a form of cash held by the institution (bank or insurance company) which can be paid out in case there is a claim. It is generally given out to large contractors who have government projects. These contractors, because of credibility, can use cash, or collateral like equipment and properties, to take out the bond. It is held until the client issues a certificate of completion.
I like this. As a matter of fact, I like anything that offers some sort of cushion for especially the new homeowner.
Now, there are concerns whether taking out an insurance or performance bond will lead to an extra cost of building the home.
Whichever way one examines it, it would be rather foolhardy not to have anything.
When you would have applied to the bank or dig deep into your savings for the new home, it was based on a projection that the cost would be around a specific amount. You would not build a $30M home if you are poor. The estimates that you would have used to determine the various costs of the project would be what you have priced at the hardware stores.
So you are investing all this money and have no guarantees whether the work will be done according to expectations? This is indeed a stupid situation. For the banks, the number of incomplete homes would be a major problem. I know of many cases in which homeowners have changed three or four contractors because of one problem or the other.
I was driving from my son’s school last Wednesday when I saw a worker fall from the top of a two-storey building under construction. He was apparently standing on a makeshift scaffold, comprising plywood. He quickly got up, dusted himself off and sat down again as the pain stepped in.
Bish Panday told me that an injured worker or his family can sue both the contractor and the homeowner. There is no protection whatsoever if it goes to court. Somebody could be made to pay…and it will either be the contractor or the homeowner. I guess there are not a lot of these lawsuits in Guyana until someone dies. In the US, it would be unthinkable for the parties involved not to have insurance. I rather suspect, also, that the law in certain areas would demand insurance related to injuries or death at the worksite.
So we come back to the performance bond. No contractor serious about being in the business should be operating on a fly-by-night basis, as the boys would say. There are investments in tools and maybe a vehicle. That is…if you are serious. The reality is that many contractors, and I know lots of them, are labourers who have learnt the trade under another and decided they will operate independently. Money is hard to come by for them. Because of the demand, they plan two or three homes to build for the year. Other contractors would take on several jobs, hire a bunch of workers, and move from site to site to supervise them.
All I am saying is that in all haste, homeowners will have to set the pace from now on. If I am putting up eight or $10M to build a home, I want you as the contractor to put up something. No ifs or buts. That there is something to ensure the work is done to satisfaction. That something is similar to what is known as a performance bond.
The contractor will have to lodge some money which is held by the banks or insurance company in a special account. The limit of any possible claims for damage will have to be, of course, below the amount that is being held. Maybe the contractor will even get interest on the money being held. It could range from $300,000 up to a $1M, depending on the need.
I know of no other ways that will force a major party in the homeownership business to toe the line.
You will, as a new homeowner, want to think also of the liabilities policy which offers protection against injuries. This could also be on the account for the contractor. These measures, of course, could come along with a written contract for the job. I think here, too, that all banks should insist on a contract prior to issuing the mortgage.
Next week, we will be talking to the banks about possibilities of training or a workshop for new homeowners who have absolutely no idea about building, but have been allotted a piece of land by government. Like I said before, a great majority, and I stress on great, are totally clueless about the process.
Don’t forget to continue sending your comments to [email protected]. Enjoy the weekend.

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