More homeowners have been renovating their homes instead of buying due to housing prices. While continuing to build equity in your home can be advantageous financially, navigating a construction project isn’t easy. And when something goes wrong, many homeowners are surprised to learn of gaps in their insurance coverage or their contractor’s. Before starting a home renovation project, take steps to help ensure you’re covered against these potential risks.
Addressing insurance risks before starting a home remodeling project
Updating your homeowners insurance before starting work
One key risk to address before starting a home construction project is insurance. Speak with your insurance agent to review your homeowners insurance policy. For one, if you will be moving out during the reno, the underwriter will likely want to know. They might ask how far away you’ll be staying, how long you’ll be out of the home, etc.
You’ll also need to discuss the scope of the project. Depending on the extent of the work, you might need a special endorsement, rider, or policy. David Travers, partner at Strang, Scott & Giroux, LLP, a law firm in Boston, MA that specializes in construction law, says “many homeowner’s policies don’t cover damage to work that is ongoing and hasn’t reached the stage of the project where the space is inhabitable.” For example, “you can find yourself hundreds of thousands of dollars into a project and then uninsured if there’s a fire” he says.
Also, review your current coverage limits before and after the reno. If you haven’t updated the replacement cost of the home or your personal property in a while, consider doing so, even if at pre-renovation values.
After the reno, you’ll need to make sure necessary increases to your underlying policy limits have been made. This means ensuring the post-construction replacement value, including the cost of any fixtures, materials, and labor to rebuild/replace are reflected. Some upgrades may reduce your premium, so discuss all the changes with your agent, including things like plumbing, electrical, fencing, detectors, etc.
Strongly consider taking pictures of your home every few years to document the condition. If you need to file a claim, the photos can help justify the replacement cost of the item(s).
With advance planning, you can also ensure you’re covered in case of theft. Especially if you need to move out of the home, construction sites can be easy targets for thieves.
Limiting your liability with an umbrella insurance policy
If you don’t already have an umbrella policy, you should seriously consider adding one. Umbrella policies sit on top of your other insurance coverages (like home and auto) and kick in once you’ve reached coverage limits on the underlying policies. Umbrella insurance typically covers situations where you face personal liability for injury, property damage, and some lawsuits.
While an umbrella policy wouldn’t cover damage to your personal property, it could help protect you if someone was injured while working on your home renovation project. Umbrella policies are very cost-effective. A policy with a high coverage limit (in the millions) might only cost a few hundred dollars per year. Think of it as a way to help protect your assets for the cost of a light fixture.
Your contractor’s insurance policy can leave you exposed during a remodel
General policy terms and coverage limits
Issues surrounding contractor’s insurance are one of the main ways homeowners inadvertently expose themselves during a remodeling project. To start, always check the coverages of your contractor before signing a contract and starting the work. This includes getting an insurance certificate, which your homeowners insurance will want a copy of. Travers suggests verifying that your broker has confirmed that your contractor actually has the insurance stated on the certificate.
Your contractor should have a general liability policy at a minimum. But you should also ask about workers’ compensation insurance and auto insurance, including rented equipment. If things go wrong, these policy limits and coverages can pose significant risks for homeowners. Travers explains that “for most residential contractors, if something happens that exceeds the limits of their insurance, they will simply go out of business, leaving the victim searching for other ways to recover.”
To avoid becoming the victim, Travers suggests ensuring the policy limits and coverages are aligned with the project, including the risk of injury or property damage. Making this determination requires thought and experience. For example, he says “if you live in a condo building and are putting in a new bathroom on the 8th floor, a water leak could damage many units, and the cost of repair won’t just be the cost of fixing your unit.”
Larger projects should consider an ‘all-risk’ policy
For larger projects, Travers suggests homeowners consider asking the contractor to provide an “all-risk” policy, which covers the work as it goes up from negligence, but also water damage, fire, etc., as well as existing work in the home.
This is important because a typical contractor’s general liability policy contains a “your work” exception that excludes the work the contractor is doing from its coverage, he says. Travers adds, “without an all-risk policy in place, a contractor’s general liability policy may cover the risk to the old parts of your house if the contractor backs an excavator into your first floor, but the new work will all be uninsured.”
Contractors are also protected by something known as the “worker’s compensation bar”, another risk for homeowners embarking on a renovation. The worker’s compensation bar limits an employee’s recovery from the employer to the maximum limits of their employer’s worker’s compensation policy, Travers explains.
But that doesn’t mean the injured employee cannot collect more from the homeowner. For example, he says “a fall off a simple 6’ ladder can yield a very serious injury, so a contractor showing $100,000 in worker’s compensation coverage is basically guaranteeing that the homeowner will get sued if there is an injury on the job site.”
Plan ahead because it will cost a lot more to fix it later
Surviving a home remodel is the best you can hope for. Though you can’t plan for all outcomes, you can plan for many foreseeable risks in advance. Having a proper insurance review can go a long way to protect homeowners against some of the worst outcomes. Fortunately, getting these coverages in place usually isn’t a heavy lift or unreasonably expensive.
In some cases, particularly if you’re planning a major renovation or complete build, consider consulting a construction attorney beforehand. A lawyer specializing in this area can draft contracts, review insurance coverage, and advise you along the way to avoid a worst-case scenario later. Unfortunately, construction horror stories aren’t hard to come by. Avoiding issues before they occur is always less expensive than trying to fix them afterwards.