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Cal/OSHA’s Indoor Heat Illness Regulations Take Effect
Cal/OSHA’s indoor heat illness prevention regulations took effect July 24, requiring employers to implement safety measures when indoor workplace temperatures reach or exceed 82 degrees Fahrenheit.
The new rules apply to most indoor workplaces, such as restaurants, warehouses and manufacturing facilities, and require employers to provide water, rest, cool-down areas and training when temperatures exceed the threshold.
The standard requires employers who have indoor worksites with higher temperatures to take immediate steps to ensure they are in compliance with the new rules.
Under the standard, most requirements for additional protections start at the 82-degree trigger, but additional ones kick in at 87 degrees. At that point, businesses would be required to take additional steps, when feasible, including cooling down the work areas, implementing work-rest schedules and providing personal heat-protective equipment.
Where workers wear clothing that restricts heat removal or work in high-radiant-heat areas, the additional requirements apply at 82 degrees.
Employers whose indoor workplaces may exceed the 82-degree threshold will need to create, maintain and make available to employees a heat illness prevention plan (HIPP), which all affected employees should be trained in and read. The plan covers all of the below.
When temperatures in an indoor workplace reach 82 degrees, employers must provide:
Access to water — You must provide access to potable water that is fresh, suitably cool and free of charge. The water shall be located as close as possible to work areas and cool-down areas.
Access to a cool-down area — You must provide access to at least one cool-down area, where the temperature must be kept at below 82 degrees.
The cool-down area should be blocked from direct sunlight, be shielded from other high-radiant heat sources and be large enough to accommodate the number of workers on rest breaks so they can sit comfortably without touching each other. The area should be as close as possible to work areas.
Cool-down rest periods — You should encourage workers to take preventive cool-down rest breaks and allow those who ask for a cool-down rest break to take one. Workers should be monitored for symptoms of heat-related illness when they are taking such cool-down rests.
Also, the standard requires employers to:
- Provide first aid or emergency response to any workers showing heat illness signs or symptoms, including contacting emergency medical services.
- Closely observe new workers and newly assigned employees working in hot areas during a 14-day acclimatization period, as well as all employees working during a heatwave.
- Provide training to both workers and supervisors in the HIPP and prevention measures.
The takeaway
The solutions for many businesses will be installing air conditioning that ensures that temperatures never exceed the 82-degree threshold in an indoor workspace. While costly, it can reduce the need for employers to take any additional steps to protect employees against heat illness.
However, while this may be a good option in smaller locations, it may not be feasible in larger facilities like warehouses and production operations due to costs and difficulty in cooling a large area.
How Landlords Can Avoid Mold Liability Lawsuits
Mold is a serious problem in a number of older homes, apartment buildings and commercial buildings.
It’s often caused by poor maintenance and unchecked water leaks that over time create conditions that are ripe for the growth of the fungus.
The problem is that this mold can aggravate tenants’ allergies, and there are plenty of cases where they sue landlords over being sickened by mold. And juries round the country have awarded large settlements (sometimes in the millions of dollars) to tenants after they claimed they were sickened by mold in their homes, apartments or offices.
Worse, it’s difficult to make a claim on your landlord’s policy if you are sued by a tenant over mold issues, as many of the policies exclude pollution.
Fortunately, there are steps a landlord can take to reduce the chances of being sued by a tenant for mold issues.
While most states do not have mold-specific laws, they do have negligence laws. And most often, mold growth is the direct result of poor maintenance or just pure negligence as some landlords may detect a leak and not bother fixing it. Leaking water and moist conditions are the breeding ground for mold.
In order for a landlord to be considered negligent in a premises liability lawsuit, they must be aware that the problem exists or should have been aware that the problem existed.
When the issue is toxic mold exposure, it’s easy for a landlord to be held liable for having allowed a toxic environment to fester.
Steps you can take to avoid being sued
You can take steps to reduce the chances of being sued by a tenant. It may take some extra time and upfront expense, but it will be worth it if you can avoid being targeted with litigation.
Require tenants to immediately notify you about water damage, broken dehumidifiers, condensation or related problems — In your lease you should require that your tenants notify you about a leak or other water issue that they become aware of. This will allow you to remediate the problem once they call and also provide you with a strong defense if they later try to sue, claiming you are liable for damages.
Some sample language that you can include in the lease could include advising tenants to keep their dwellings clean, remove visible moisture on windows, walls, ceilings, floors and other surfaces as soon as possible, and notify landlords — in writing — about any signs of water leaks, water infiltration or mold.
Require tenants to carry renter’s insurance — Your insurance will cover the structure itself, but renter’s insurance will cover any mold damage to your tenants’ property and belongings.
Stay to a strict maintenance schedule — You should schedule times with your tenants so you can regularly inspect for leaks in pipes, windows and roofs, as well as water staining, and moisture and condensation (including in the HVAC system). Leaks are usually where mold starts.
During inspections, besides looking for those obvious issues, you should look out for mildewy, musty odors, and look for mold and fungus. If you find any issues, remediate them promptly.
Respond quickly when a tenant complains — Proactive landlords that fix problems their tenants raise, have a much less chance of being sued. Therefore, if one of your tenants reports a mold or moisture problem, you should immediately have the property inspected by a professional.
If they detect any mold, mildew and/or leaks that may be causing it, you should hire professionals to remove the mold and repair any problems that were causing the growth in the first place.
Make sure to document any inspections you conduct, as well as any repairs, cleanup and remediation.
Finally, you should make sure to follow up with your tenants to make sure the problem hasn’t recurred. A good idea is to check with them a week later, a month later and then six months later. But before that six-month mark, you may want to have the property reinspected for mold.
Insurance
The typical landlord’s insurance policy covers:
Property damage — From fire or other natural catastrophe.
Lost rental income/rental default — Should something cause your property to be uninhabitable (severe mold, termites, a rat infestation or a sinkhole), this provides temporary rental reimbursement to cover the income you’d otherwise receive if tenants could be occupying the property. It also covers lost income from a tenant’s rental default.
Liability — This is coverage for the medical or legal costs that might ensue if the tenant or a visitor suffers injury due to a property maintenance issue.
Commissioner Orders Benchmark Workers’ Comp Rate Reduction
California Insurance Commissioner Ricardo Lara has ordered that the state’s average benchmark workers’ compensation rate be cut by 2.1%, starting Sept. 1.
The decision rejected the Workers’ Compensation Insurance Rating Bureau’s recommendation that the benchmark rate be raised by 0.9%, citing a slight uptick in claims costs and claims-adjusting costs.
The benchmark rate, also known as the pure premium rate, is a base rate that insurers can use to price their policies. It only includes only the cost of claims and claims-adjusting costs and does not take into account other forms of overhead and profits.
Each class code gets its own pure premium rate, and some classes may see increases and others further decreases. Every employer’s premiums will differ depending on their claims experience, industry and location.
Also, insurers are not required to use the pure premium rate and are free to price their policies as they see fit.
The decision is a further reflection of the low pricing environment for workers’ compensation, a rare bright spot in an insurance market that has seen hefty rate increases in other lines, such as commercial property and liability coverage.
The average benchmark rate will fall to $1.38 per $100 of payroll, down from the current $1.41.
Reasons behind Lara’s decision
Factors that the commissioner cited as influencing his decision include:
- The continuing decrease in the number of medical services associated with each workers’ comp claim, and
- A continuing decline in the percentage of claims with permanent disability benefits.
The new rate applies to policies incepting on or after Sept.1, 2024.
If you have questions about your coverage, please give your agent a call.
Electric Tools Pose Dangers, Train Staff in Proper Usage
Each year, hundreds of construction workers suffer shock when handling electrical tools and equipment.
One of the big problems in understanding the dangers of electrical shock is the mistaken belief that only high voltages kill. It’s not the voltage that’s lethal, but the amount of current that passes through the body. The condition and placement of the body has a lot to do with the chance of getting a shock.
It’s important that employers train their workers about the basic facts regarding the causes of electrical shock when using these tools.
Water and electricity
Damp areas and metal objects can offer good shortcuts for electricity to reach the ground. If a worker’s hands are sweaty, if socks and shoes are moist or damp, if the floor is wet or they are standing in a puddle of water, the moisture may allow more current to pass through the body.
If work is to be done with metal objects or in damp areas, workers should recognize the hazards and take necessary precautions. These include:
- Rubber gloves and boots,
- Rubber mats,
- Insulated tools, and
- Rubber sheets that can be used to cover exposed metal.
Also, during times of rain, extra caution should be taken when working with electrical equipment or working near grounded objects.
Other precautions
It’s not just the presence of water that can cause a worker to be electrocuted. Electricity is always a danger, and workers should take all precautions necessary to avoid injury or death.
It’s important that you teach them the following:
- Treat every electric wire as if it were a live one.
- Inspect equipment and extension cords before each use.
- Take faulty equipment or plugs with bent or missing prongs out of service for repair.
- Only qualified electricians should repair electrical equipment or work on energized lines.
- If a plug doesn’t have three prongs or if the receptacle doesn’t have three openings, make sure the tool is grounded in some other way before use.
- Never try to bypass an electrical system by cutting off the third prong of a plug.
- Turn off the power and report the smell of hot or burning plastic, smoke or sparks, or the presence of flickering lights.
- Stop using a tool or appliance if a slight shock or tingling is felt.
- Never disconnect an electrical plug by pulling on the cord.
- Whenever working on an electric circuit, the circuit should be turned off and locked out at the circuit breaker or fuse box to ensure that it cannot be accidentally turned on.
- Those who regularly work on or around energized electrical equipment should be trained in emergency response and CPR.
The takeaway
The use of electrical tools requires additional precautions on the part of your workers. It’s important that you train them in proper usage and how to spot potential dangers of electrocution.
EEOC Issues Updated Workplace Harassment Guidance
For the first time in 25 years, the Equal Employment Opportunity Commission has issued updated workplace harassment guidance for employers, increasing possible exposure to employee-initiated lawsuits.
The new guidance expands employee protections to include harassment based on sexual orientation and gender identity, as well as taking into account that harassment can be perpetrated virtually via text messaging, e-mails and other online or app-based mediums.
These are federal guidelines, meaning that they open a new avenue for potential employment practices liability exposure. Employers should understand this new guidance to ensure they don’t run afoul of the law and risk being sued by a worker.
Sex-based harassment
The new guidance expands the definition of sex-based harassment to include harassment related to breastfeeding, morning sickness, contraception and the decision to obtain — or not obtain — an abortion.
It also expands protections to include harassment based on sexual orientation and gender identity. An example of the latter would be an employer intentionally and repeatedly using a name or pronoun that is inconsistent with the worker’s gender identity, or denying access to bathrooms that are consistent with their identity.
Virtual harassment
The guidance notes that harassment does not have to be perpetrated in person to be illegal.
It states that harassment can also occur in the “virtual work environment,” such as through the company e-mail system, electronic bulletin boards, instant message systems, videoconferencing technology, intranet or official social media accounts.
The EEOC stated that while off-duty offensive social media posts sent on work systems generally don’t constitute harassment, they may if they impact the workplace, such as if the postings are directed at a particular employee or employer and are referenced at work.
The agency also stated that even if offensive material is sent while off-duty on non-work systems, like using personal phones or tablets to text harassing messages or making derogatory posts on their own social media accounts, it could be considered illegal.
The takeaway
The EEOC has designated workplace harassment as an enforcement priority.
Employers should update their anti-harassment policies and procedures in their employee handbooks to reflect the changes to EEOC guidance. Managers and supervisors should be trained in the new guidance as well.
The EEOC recommends that anti-harassment policies, at a minimum:
- Define what conduct is prohibited, and be widely disseminated;
- Be comprehensible to workers, including those whom the employer has reason to believe might have barriers to comprehension, such as limited literacy skills or proficiency in English;
- Require that supervisors report harassment when they are aware of it;
- Offer multiple ways to report harassment;
- Identify points of contact to whom reports of harassment should be made, including contact information; and
- Explain the employer’s complaint process, including the anti-retaliation and confidentiality protections.
OSHA Updates HazCom Standard
Changes are once again coming to Fed-OSHA’s Hazardous Communications Standard, which governs the handling of chemicals and other dangerous substances.
OSHA’s final rule, which takes effect July 19, 2024, will bring the standard in line with the latest update to the United Nations’ Globally Harmonized System of Classification and Labelling of Chemicals.
The update revises criteria for the classification of certain health and physical hazards, as well as updating labeling requirements and safety data sheets (SDSs), among other changes.
OSHA said it had updated the HazCom standard “to better protect workers by improving the amount and quality of information on labels and safety data sheets and allow workers and first responders to react more quickly in an emergency.”
Affected firms will have to update any alternative workplace labeling as well as their HazCom program, and provide any additional employee training for newly identified physical, health or other hazards.
Compliance deadlines are staggered:
First: Chemical manufacturers, importers or distributors evaluating substances will have to comply by Jan. 19, 2026, while those that evaluate mixtures will have to comply by July 19, 2027.
Second: Other employers will have to comply six months after those dates: July 19, 2026 for those that handle, store or use substances, and Jan. 19, 2028 for mixtures.
It’s important for employers to stay up to date on the HazCom standard to protect their workers. Labels and SDSs are often the first indication to a worker that they are handling a hazardous chemical, so it is imperative that they be as accurate and complete as possible.
What the rule does
The new rule ensures that OSHA’s HazCom standard jibes with the Global Harmonized System, which is used in most developed and many developing countries around the world. It provides consistent definitions of hazards, specific criteria for labels, and a specific format for safety SDSs.
It should be noted that the new classification criteria only affect SDSs and labels for certain products (aerosols, desensitized explosives and flammable gases). If your firm handles any of these you will have to ensure that your labels and SDSs for select hazardous chemicals are updated accordingly.
Some of the highlights of the rule:
Labeling — It updates labeling requirements for certain very small containers and bulk containers to ensure the labels are comprehensive and readable.
Manufacturers must also only provide the updated label for each individual container with each shipment once the product reaches its customer. Warehousing employees will not be required to open sealed pallets and boxes of containers to relabel them or repackage the product in preprinted bags.
Flammable gas addition — The flammable gas hazard class gets a new hazard class (desensitized explosives), as well as new hazard categories:
- Unstable gases in the Flammable Gases class
- Pyrophoric gases in the Flammable Gases class, and
- Nonflammable aerosols in the Aerosols class.
New and revised definitions — There are a number of definitions that are being revised or which are new altogether.
Employer takeaway
HazCom citations are one of the most common citations that OSHA issues. If your operations handle chemicals, you should take the opportunity now to review your HazCom programs and plan for compliance by the deadline that affects your company.
Light Duty Can Reduce Workers’ Comp Claims Costs
After an employee is injured on the job, recuperation times can vary, but every day they are away from work, the claim cost increases and your productivity suffers.
By implementing a program that offers a good incentive to return, you can reduce the risk of paying more benefits than necessary.
Recent research shows that employers lose about 80 million workdays annually due to workplace injuries or illnesses. The number of employees who remain away from work for more than seven days because of injuries or illnesses stretches into the millions.
This means that employers are left to deal with the high cost of workers’ compensation premiums, lost productivity and disability benefits. But, by creating a special incentive program, you can greatly reduce these costs.
Light duties
When an injured worker is off work and healing, a physician will regularly examine them. These exams will in part determine whether the worker is ready to return to their previous tasks.
In some cases, it may be possible to get the individual back to work sooner with light duties.
For example, consider a worker who is injured while lifting boxes in a warehouse. The attending physician will be examining the employee to determine whether he or she is ready to lift boxes again.
If the employee has a back injury, it could be several weeks before they can return to work.
But, if the employer offered the worker an easy temporary job in the office, they may be able to return much sooner. To make something like this happen, a light-duty program must be put in place. A solid program should have the following features:
- Addresses environmental, physical, knowledge and emotional factors that may prevent employees from returning to work.
- Makes the transition to full-time work easier.
- Focuses on employees’ abilities instead of their disabilities.
Light-duty programs improve employee morale by increasing incentives for returning to work and staying safe. For the employer, they maintain productivity by lowering the number of lost work days.
These programs help speed up employees’ recovery processes. Recent research shows that 50% of workers who stay out of work for more than six months will never return to their jobs. If they stay out for more than one year, the likelihood of returning to work is about 10%.
Getting employees back to work as quickly as possible is the best way to bring about feelings of being part of the team. It also lessens the financial impact on the employee and their family.
The elements of a solid plan
To make sure a program is as comprehensive as possible, include the following elements:
- Performing meaningful tasks instead of simple busy work.
- Coordination with the doctor about work restrictions.
- Alternative work assignments that benefit the employer and employee.
- Descriptions of duties the injured employee must perform.
- Provisions for situations where employees may have to take additional medical leave time after returning to work.
- Stated conditions and time parameters for temporary assignments.
Benefits of return-to-work programs
- Making it easier to keep valuable employees, who are productive while recovering.
- Making communication happen between employees, employers and doctors, instead of between employees and their doctors.
- Making it difficult for employees to stay out of work longer than necessary.
- Reducing the need to recruit, hire and train new workers.
- Reducing the cost of workers’ comp disability payments to injured workers.
- Showing your concern for the injured employee’s health.
- Reducing claims costs, which can help reduce your rates.
The takeaway
Workers’ compensation consumes a sizable portion of overall personnel costs. A solid return program can reduce those costs, including intangible ones, like the absence of an experienced worker. Also, it is good for employee morale.
Newsom, Business Groups Agree on PAGA Reforms
California Governor Gavin Newsom, legislators and business groups have struck an agreement to reform a law that has become a costly thorn in the side of employers operating in the state, the Private Attorneys General Act.
The deal averts a showdown over a business-backed initiative slated to be on the November ballot that would repeal the law outright. The reform legislation seeks to keep the law intact while limiting frivolous litigation by allowing employers to make things right after a PAGA action has been filed.
PAGA allows workers who allege they have suffered labor violations, like unpaid overtime or being denied mandatory meal and rest breaks, to file suit against their employers rather than the more typical route of filing a claim with the state Department of Labor Standards Enforcement (DLSE).
The law essentially allows employees, represented by private attorneys, to stand in for the state and all their co-workers in suing their employer.
One reason workers pursue PAGA claims is the tremendous backlog that the DLSE faces, and they do so in the belief that the claim will be handled more quickly. However, a report by the Fix PAGA Coalition found that workers filing claims directly with the DLSE wait fewer than 10 months on average for their awards, compared to 23 months for PAGA court case awards.
PAGA settlements have exploded in recent years, jumping 100% between 2016 and 2022, according to a study by the California Chamber of Commerce.
Proceeds from settlements are split 25% with the employee who filed the case and the rest with the state, which collected more than $200 million in civil penalties during the 2022-2023 fiscal year.
The Fix PAGA Coalition’s report found that non-profits, small businesses and other employers have paid out nearly $10 billion in PAGA case awards since 2013, with attorneys receiving the far bigger portion of the settlements and employees consistently receiving only minimal payments.
Backers of the PAGA ballot initiative agreed to withdraw their measure if the legislation is passed and signed into law, which it was on July 1.
Highlights of the agreement
The governor’s announcement highlighted that the measure would:
Redefine ‘standing’ — It would require workers to personally experience the alleged violations brought in a claim.
Cure provisions – It would expand the list of Labor Code violations that can be cured before a PAGA action commences, which could allow employers to avoid lawsuits by making employees whole after receiving notice of alleged violations.
Limiting claims – It would codify a court’s ability to limit the scope of claims presented at trial to better manage the complaint.
Reforms penalty structure — It would cap penalties on employers that quickly fix policies and/or practices to make workers whole after they receive a notice of a PAGA action. It also caps penalties on employers that proactively comply with the Labor Code before receiving a PAGA notice.
Workers larger share of awards – It would increase the portion of awards allocated to employees to 35% from 25%.
Newsom agreed to pursue a trailer bill to provide funding for the Labor Department to expedite hiring and filling vacancies.
The takeaway
Jennifer Barrera, CEO of the California Chamber of Commerce, said in a prepared statement: “This package provides meaningful reforms that ensure workers continue to have a strong vehicle to get labor claims resolved, while also limiting the frivolous litigation that has cost employers billions without benefiting workers.”
Legislators will have to move quickly to pass the measure into law by the June 27 deadline. While the legislation will not eliminate PAGA, all sides of the agreement predict it would go a long way towards reducing frivolous claims.
Changes Coming to Electronics, Dual-Wage Class Codes
California Insurance Commissioner Ricardo Lara on May 31 approved all of the Workers’ Compensation Insurance Rating Bureau’s recommended changes to class codes for some electronics manufacturing sectors, as well as increases to the wage thresholds for construction industry dual classifications.
The following changes will take effect for policies incepting on or after Sept. 1, 2024:
Electronics manufacturing industry
One of the changes links two more classes to the 8874 companion classification, which was created in September 2022 to cover certain low-risk classes in the electronics industry group.
Currently, 8874 is a companion class that covers payroll for lower-risk jobs in hardware and software design and development, computer-aided design, clerical and outside sales operations for two electronics industry classes:
- 3681 (manufacturing operations for electronic instruments, computer peripherals, telecommunications equipment), and
- 4112 (integrated circuit and semiconductor wafer manufacturing).
Starting Sept. 1, similar low-risk white-collar personnel currently assigned to class 3572 (medical instrument manufacturing) and 3682 (non-electric instrument manufacturing) will be linked to the 8874 companion class code.
Dual-wage increases
The thresholds that separate high- and low-wage earners in 16 dual-wage construction classes are also increasing Sept. 1.
These class codes have vastly different pure premium rates for workers above and below a certain threshold as the lower-wage workers (often who are less experienced) have historically filed more workers’ comp claims. Rates for lower-wage workers are often double the rates for higher-wage workers.
The following illustrates the changes:
| Classification | Current threshold | Threshold starting 9/1 |
| 5207/5028 Masonry | $32 | $35 |
| 5190/5140 Electrical Wiring | $34 | $36 |
| 5183/5187 Plumbing | $31 | $32 |
| 5185/5186 Automatic Sprinkler Installation | $32 | $33 |
| 5201/5205 Concrete or Cement Work | $32 | $33 |
| 5403/5432 Carpentry | $39 | $41 |
| 5446/5447 Wallboard Installation | $38 | $41 |
| 5467/5470 Glaziers | $36 | $39 |
| 5474/5482 Painting/ Waterproofing | $31 | $32 |
| 5484/5485 Plastering or Stucco Work | $36 | $38 |
| 5538/5542 Sheet Metal Work | $29 | $33 |
| 5552/5553 Roofing | $29 | $31 |
| 5632/5633 Steel Framing | $39 | $41 |
| 6218/6220 Excavation/Grading/Land Leveling | $38 | $40 |
| 6307/6308 Sewer Construction | $38 | $40 |
| 6315/6316 Water/Gas Mains | $38 | $40 |
Common Mistakes with Builder’s Risk Coinsurance Clauses
Coinsurance clauses are commonly found in a builder’s risk completed value policy.
A coinsurance clause involves the policyholder becoming a co-insurer of the risk of loss with the insurer. In other words, certain conditions would result in the insurance company not paying the total amount of loss, thereby leaving the policyholder to bear the remainder. The insured and the insurer jointly assume the risk.
The benefit of buying an insurance policy with such a clause is that the policyholder will usually have relatively low premiums compared to other similar policies that don’t contain a coinsurance clause.
That said, anyone considering a coinsurance clause should understand what it entails and requires, so that they aren’t taken by surprise with penalties if a loss should occur.
A typical coinsurance clause found in a builder’s risk completed value policy will say that the insurer will not pay more for any loss than the proportion that the limit of insurance bears to the value of the structure described in the declarations as of the structure’s date of completion.
How it works
The way a coinsurance clause works with the policy limit is often a source of confusion for policyholders.
Take a loss of $20,000 with a policy limit of $100,000, for instance. It would superficially appear as though the insurer would be responsible for the total loss.
But, once the coinsurance clause is figured into the equation, the insurer might not be responsible for paying the total loss amount. This will depend on the policyholder maintaining enough insurance to avoid the coinsurance penalty.
If the coinsurance is applied, it might look something like this:
Still using the $100,000 policy and $20,000 worth of damage from above, the completed value of the project will be determined as $120,000 at the time of loss. The value of the $100,000 policy is only 80% of the $120,000 actual value of the project. So, the insurer is only responsible to pay $16,000, which is 80% of the $20,000 worth of damage.
Anytime the policyholder receives a lesser sum than what the full value of the claim is because of a shortfall between the completed value of the project and the policy limit, it’s termed a coinsurance penalty. The discrepancy between the two numbers can be the result of a number of mistakes made by the policyholder.
Common errors
Policyholders often make the mistake of failing to report when expected costs are surpassed. Any increased completed value must be shown in the policy limit when costs overrun original figures. The best way to make sure the policy limit is updated is by keeping your insurance agent apprised to the overruns so that the appropriate changes can be made.
All too often a policyholder makes the mistake of setting their limit of insurance based on the amount of the construction loan for the structure.
Most of the time, the completed value of the project is greater than the amount of the construction loan. An example would be a significant portion of a building project being funded by cash, but not computing the cash amount when totaling the completed value. If the insurance is only for the financed amount, then the policyholder will suffer a coinsurance penalty for any losses.
Another common mistake occurs when the policyholder doesn’t include profit and overhead in the completed value. These are generally figured at 10% for each. If not accounted for, this can cause a substantial coinsurance penalty.
Sometimes, it’s what shouldn’t be included that may lead to problems. Land value, excavations, and underground work, for example, shouldn’t be included in the completed value. These aren’t covered losses on typical policy forms. So, the policyholder would just be paying additional costs for items that wouldn’t be covered during loss.