Michigan Home Builder and Remodeler Insurance: Builder's Risk, Defects and Subs

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Michigan home builder insurance starts with general liability that covers completed work for years after closing, builder's risk on every home under construction, workers' compensation that accounts for your subcontractors, and commercial auto and equipment coverage. Michigan's builder license may not require insurance, but your business does: working without it means one claim can take the company, and possibly your personal assets, with it. An established builder should carry at least $1 million per occurrence and $1 million aggregate.

The license doesn't require insurance. Your business does.

Residential builders and maintenance and alteration contractors are licensed by LARA under Article 24 of the Occupational Code. The license requires 60 hours of pre-licensure education, an exam and a qualifying officer for a company. It does not require general liability insurance or a surety bond, despite websites claiming Michigan builders must carry $100,000/$300,000 of liability to be licensed. Do not read that as permission to go without. The licensing law sets the bar for working legally; it says nothing about what it takes to survive a claim.

If you are doing any work at all, you need to be insured. Here is why:

• Workers' comp is the law anyway. Michigan's workers' compensation act applies if you have three or more employees, or even one working 35 or more hours a week for 13 weeks in the past year (MCL 418.115). The license does not change that.
• Serious customers and lenders will not work with you without it. Construction lenders, custom-home clients and general contractors ask for a certificate of insurance before the first payment. No certificate, no job.
• One claim can end the business. A fall on your site or a water loss from a failed flashing detail can easily exceed what a small builder can pay out of pocket, and you stay exposed for six years after every home you finish.
• A judgment you cannot pay becomes a license problem. Michigan lets homeowners file a licensing complaint within 18 months of completion or occupancy, and failing to satisfy judgments is one of the grounds.
• There is no state fund behind you. Michigan's Homeowner Construction Lien Recovery Fund was repealed in 2010. If a builder cannot pay a claim, nothing steps in.

And if you are working without a license, Michigan law is even less forgiving: an unlicensed builder cannot sue to collect payment or file a construction lien, and faces civil fines of $5,000 to $25,000 (MCL 339.2412).

Builder's risk: who buys it, and when it ends

Your general liability policy does not cover the house you are building. The structure, materials on site and temporary structures need builder's risk insurance. We know of no Michigan law that says who must buy it; the contract decides.

• Spec homes: you own the risk, so you buy it.
• Custom homes on the owner's lot: it is negotiated, and the construction lender often dictates it. Whoever buys it, make sure both the owner and the builder are named.
• Insure to completed value. Builder's risk forms generally expect the limit to equal the finished value of the project. Insuring only what is built today can shrink the claim payment through a penalty for inadequate insurance.
• Know when it stops. Coverage generally ends at or shortly after occupancy, sale or completion — the ISO form, for example, ends 60 days after the building is occupied or 90 days after construction is complete, whichever comes first, and many carriers' forms end sooner. Homeowners moving in before final punch-list work is a common way to lose coverage without noticing.
• Remodels are different. On a remodel, the existing house is insured by the homeowner's policy. Your materials and the new work in progress may need an installation floater or a builder's risk form written for renovations.

Defect claims: six years, and the Skanska decision

Michigan's statute of repose (MCL 600.5839) bars most claims for injury or property damage from a defective improvement to real property unless filed within six years of occupancy, use or acceptance of the completed work. For gross negligence, a claim can be filed within one year of discovery, but never more than ten years after occupancy. The statute also covers contribution and indemnity claims against the contractor.

That six-year tail is what products-completed operations coverage on your general liability policy is for, and it is only as good as the policy in force when the claim is made. Two things decide whether it responds:

• Faulty workmanship can be an "occurrence." In Skanska USA Building v MAP Mechanical Contractors (2020), the Michigan Supreme Court held unanimously that unintended faulty subcontractor work that damages the insured's own work can be an accident under the current standard liability form. Older Michigan rulings saying otherwise now apply only to pre-1986 policy forms. The standard form's exception for work performed by subcontractors is what gives a general contractor this coverage — and endorsements that remove it are a common thing to look for on your schedule of forms.
• Residential exclusions are carrier-specific. Some contractor policies exclude residential work, multi-unit or tract housing, or "action-over" claims where a sub's injured employee sues you. These are the carriers' own endorsements, not standard ISO forms, so read your schedule of forms line by line.

If you offer design-build, look for ISO's contractors professional liability exclusion (CG 22 79). It excludes claims from design services you provide or hire out, while preserving coverage for construction means and methods. Design errors may need their own coverage.

Subcontractors and Michigan workers' comp

Under Michigan's statutory-employer rule (MCL 418.171), a builder can be liable for workers' compensation benefits to an injured employee of an uninsured subcontractor. At audit, carriers generally charge premium on payments to subs who cannot produce a certificate of insurance. Collect certificates before the first payment, not at year end. Our post on workers' comp for 1099 subcontractors covers this in detail.

Michigan rates comp under its own classification manual. Residential carpentry on one- and two-family dwellings is code 5645, cabinet and interior trim work is 5437, and roofing is rated separately. Payroll that is not split by records ends up in the higher-rated code.

Frequently Asked Questions

Do Michigan residential builders have to carry insurance?

The license itself does not require liability insurance or a bond, but in practice you cannot operate without it. Workers' compensation is required by law once you have employees, lenders and customers require proof of liability coverage before they pay you, and you remain exposed to defect claims for six years after every home you finish. With no state recovery fund behind builders, an uninsured claim is paid by you.

Who pays for builder's risk insurance, the builder or the homeowner?

Whoever the construction contract assigns it to. Builders typically buy it on spec homes. On custom homes the owner, builder or lender may buy it, and the lender often requires it. The policy should name both the owner and the builder and be written to the home's completed value.

How long is a Michigan builder liable for construction defects?

Michigan's statute of repose generally bars claims filed more than six years after occupancy, use or acceptance of the completed work. For gross negligence, the deadline is one year after the defect is or should have been discovered, but never more than ten years after occupancy.

Does general liability cover faulty workmanship in Michigan?

It does not pay to redo your own defective work, but after the Michigan Supreme Court's 2020 Skanska decision, unintended faulty subcontractor work that damages other parts of the project can be a covered occurrence under the current standard form. Endorsements that remove the subcontractor exception or exclude residential work can take that away.

What limits should a Michigan home builder carry?

We recommend at least $1 million per occurrence and $1 million aggregate on general liability, with a separate products-completed operations aggregate and a commercial umbrella above it. Custom-home clients and lenders often ask for more, and a single defect claim involving water damage throughout a house can exceed a smaller limit.

The bottom line

A builder's insurance program is judged six years after closing, when the first defect letter arrives. The questions that decide it are whether your policy still covers subcontracted work, whether it excludes the kind of homes you build, and whether builder's risk ended before the owner moved in.

We work best with established Michigan builders and remodelers — a licensed company with payroll, a steady book of residential projects, subs you collect certificates from, and a few years of loss runs. Send us your current declarations pages, your full schedule of forms, a sample construction contract and your last two loss runs, and we will show you where the gaps are before we talk about price. J. Jacobs & Associates has insured Michigan contractors for more than forty years, and as an independent agency we take your program to multiple preferred commercial carriers. Call (248) 693-6455 or request a contractor review.