More homeowners are choosing to renovate their homes instead of buying new ones due to rising housing prices. While this can be financially beneficial as it builds equity, managing a construction project can be challenging. Many homeowners are often caught off guard by gaps in their insurance coverage or their contractor’s coverage when things go wrong. Before starting a home renovation, it’s crucial to take steps to ensure you’re protected against potential risks.
When a homeowner is uninsured or underinsured during a renovation, hidden liabilities and risk of loss can arise, often without the homeowner realizing it. It’s essential to address insurance issues before starting a construction project. Talk to your insurance agent to review your homeowner’s insurance policy. If you plan to move out during the renovation, your underwriter will need to know details like how far away you’ll be staying and for how long.
Discuss the scope of the project with your insurance agent. Depending on the extent of the work, you might need a special endorsement, rider, or policy. Many homeowner policies don’t cover ongoing work until the space is habitable, which means you could be uninsured if there’s a fire or other damage during the project.
Review your current coverage limits before and after the renovation. Update the replacement cost of your home and personal property. After the renovation, make sure your policy limits reflect the post-construction replacement value, including fixtures, materials, and labor. Some upgrades might reduce your premium, so discuss all changes with your agent, including plumbing, electrical, fencing, and detectors.
Consider taking pictures of your home every few years to document its condition. These photos can help justify the replacement cost if you need to file a claim. Also, plan for theft protection, especially if you must move out during the renovation, as construction sites can be easy targets for thieves.
If you don’t already have an umbrella policy, you should seriously consider adding one. Umbrella policies provide additional coverage once you’ve reached the limits of your underlying policies and can protect you in situations involving personal liability for injury, property damage, and some lawsuits. Although umbrella policies don’t cover damage to personal property, they can protect you if someone gets injured while working on your renovation. These policies are usually cost-effective, often providing high coverage limits for a few hundred dollars per year.
Contractor’s insurance is another critical area where homeowners can inadvertently expose themselves. Always check your contractor’s coverages before signing a contract. Obtain an insurance certificate and ensure your broker verifies the contractor’s insurance. Your contractor should have a general liability policy at a minimum, but you should also ask about workers’ compensation and auto insurance, including coverage for rented equipment.
Ensure the contractor’s policy limits and coverages align with your project’s risks, including potential injury or property damage. For larger projects, consider asking the contractor to provide an “all-risk” policy, which covers the work as it progresses, including negligence, water damage, fire, and other risks. Typical contractor’s general liability policies exclude coverage for the work being done, so an all-risk policy is essential.
Contractors are also protected by the “worker’s compensation bar,” which limits an employee’s recovery to their employer’s policy limits. However, injured employees can still seek additional compensation from the homeowner. Ensuring adequate worker’s compensation coverage is crucial to avoid potential lawsuits.
Planning for a home renovation involves anticipating and mitigating risks. A thorough insurance review can help protect you from some of the worst outcomes. Often, getting the necessary coverages in place is neither difficult nor overly expensive. For major renovations, consider consulting a construction attorney to draft contracts, review insurance coverage, and provide ongoing advice to avoid worst-case scenarios.
Surviving a home remodel requires careful planning and preparation to handle foreseeable risks. Proper insurance and legal guidance can help you avoid costly issues and ensure a smoother renovation process.