We asked Ted Olsen, managing director at Goosehead Insurance in Westlake, Tex., and Justin Staebler, senior vice president of personal lines insurance for the Johnson Financial Group in Waukesha, Wis., to explain the connection between renovations and insurance. Both responded by email, and their responses were edited for length and clarity.
If a homeowner is contemplating a home renovation, should they contact their home insurance company before they start?
Olsen: Yes, depending on the scope of the renovation your agent may need to add coverage, or in some instances, issue a supplemental policy to protect the home during the renovation. Some insurance providers will reduce coverage during a renovation if proper coverage is not added, so it’s important to be transparent with your insurance agent before beginning any renovation.
Staebler: Before you start a remodeling project or hire a contractor to work on your home, it’s essential to revisit your homeowner’s policy with your insurance partner. While certain improvements may provide safety discounts, others will likely require additional or different insurance coverage — depending on the value they add to your home. There also may be coverages unique to remodeling projects that should be considered. If you’re adding square feet, moving walls or finishing a basement, you may need a “builder’s risk” policy or an “under construction” endorsement. With a builder’s risk policy, you can cover theft of materials on the job site or damage from the collapse of the structure, for example.
Is it necessary to contact the home insurance company after the renovation?
Olsen: Your insurance policy is only written to protect the home at its pre-renovation value. It’s important that you contact your insurance agent after renovations are completed to do a new replacement value estimate. If you don’t do this, you can find yourself without sufficient coverage to rebuild the home if there were a total loss and paying thousands out of pocket.
Staebler: You may need to change the builder’s risk policy back to a homeowner’s policy. Also, you could have made some improvements to your home that would give you some new discounts. You should have replacement cost coverage for your home based on the improvements, which is the total cost to rebuild or repair your entire home. The cost to replace your home includes the expense and availability of labor and materials, fuel costs, and the special characteristics within your home. In most cases, the cost to rebuild your home is much higher than what you paid for your home or the market value.
Should homeowners expect their premiums to increase or decrease after the renovation?
Olsen: There are several factors that go into the pricing of an insurance policy, and renovations can cause an increase or decrease. For example, an increase in premium would likely result if you added additional square footage to the home or increased the quality of materials with more costly ones such as replacing vinyl flooring with hardwoods. This is because the home will now cost more to rebuild if there were a claim in the future. Another way your premium might go up is if you were to increase the risk factors in a home that increase the likelihood of a claim, such as adding a swimming pool. On the other hand, some renovations often result in a lower premium. Many home insurers give discounts for new roofs, updated plumbing, wiring and HVAC systems.
Staebler: In general, updates that make your home more secure may help you save money, such as adding safety features including security systems, gas detectors, smoke alarms and fences around a backyard or pool. Updating or replacing your HVAC system, electric and plumbing can lower hazard risks and can also benefit your homeowner’s coverage.
Are there circumstances when home insurance might pay for a renovation?
Olsen: Your home insurance policy was made to protect you in the case of an unexpected event such as a fire or theft and to make you whole again. The policy will put the damaged items back the way they were before the loss but not improve them.
Staebler: Yes, if there was a claim to your home the insurance company would be obligated to cover the damage to ensure the home was in the condition before the claim. If a homeowner wants to make improvements such as upgrading the flooring, then the homeowner would need to pay the difference between the current condition and the improvements.
What about contractor coverage — what should the contractor have for insurance?
Olsen: The contractor should carry their own general liability policy to cover them in case they make any mistakes or cause serious damage to your home. While not mandatory in some states, the contractor should also carry workers’ compensation insurance to protect against injury that might befall any of their employees they have working on your renovation. Without this coverage, the cost of injury to the contractor or any subcontractors could fall to the homeowner. Depending on the scope of the project, the contractor may provide builder’s risk coverage to protect the increase in value of the home and the building materials being used to renovate the home during construction.
Staebler: If you plan to hire professionals for the project, you’ll want to verify they have appropriate coverage to protect both of you in case of an unexpected event. Your contractor should have liability, property and workers’ compensation insurance. Remember to ask the contractor to provide you with a certificate of insurance and confirm that any subcontractors also have appropriate coverage. Your agent should be willing to review these documents to be sure they are up to date.
Do homeowners need coverage for their contractors, too?
Olsen: As a homeowner, it’s important that you carry high limits of personal liability coverage on your home insurance policy to protect yourself against any accidental injury you might be found liable for during construction. While most home insurance policies max out at $500,000, you should consider purchasing an umbrella policy to increase the liability protection that you have.
Staebler: As a homeowner, you do not have an insurable interest in the contractor’s business so you cannot get insurance coverage for their business. The best way to ensure you are covered is to ask your contractor for their coverage and review it with your agent.