Most contractors and homebuilders have no insurance to cover their mistakes. There may be coverage if they damage your personal property.
Many homebuyers assume that because they are buying a house from a home builder who has built dozens of houses and who is selling a house worth $150,000 to $1,000,000 or more have insurance to cover their mistakes. Most homebuilders have no insurance to cover the construction defects they create. They will all claim they have insurance and the kind of insurance they get is called "Builders Risk" which is a policy that covers them for any losses due to fire, storm, vandalism or other sudden event that causes damage to what they are building. This "builders risk" policy does not cover them for bad workmanship or for failing to follow the building code or not following the plans for the house.
It would be a near miracle if a home builder, especially a small custom builder, had a policy that covers their mistakes. Such a policy would in effect be an "errors and omissions" policy or similar to a malpractice policy for a doctor or lawyer. I am not saying that some builder out there does not have such a policy, but I have never seen a builder with one and I doubt I will in small normal residential construction.
So what difference does it make if there is no insurance? Well, it means that you can bring a lawsuit and win on liability, win tens of thousands of dollars in damages with attorneys' fees and be left with only your piece of paper.
Is this a risk you can afford? Yes if you do your homework.
For a house already constructed, you need to have a qualified builder other than your seller go through the house and inspect it for quality and workmanship. Whatever he or she charges is worth the price. Contractors can easily see the shortcuts, poor workmanship and future problems especially in someone else's home.
For a house being built, hiring a contractor to inspect the stages of construction is imperative and should include you attending each visit with your contractor.
So what if it is too late and you have already bought a house and you are now having trouble with your home builder? You can bring an action against them but most attorneys will require an hourly fee. Consequently, you may want to do some research into the home builders' property ownings and assets since collectability, the ability to get the money from a defendant, is as important to a contingent fee attorney as the liability and damages facts.