November 19, 2013, by Willy Hoffman Jr., CIC
Renovating or adding an addition to your home, can cause several Property and Liability issues. Most insurance companies define a renovation or addition as something that costs more than 5% of your Dwelling limit and/or causes you to move out and leave your home vacant for over 30 days.
1. Adequate Limits:
$500,000 Current Replacement Cost of your Home
$700,000 Estimated Home Replacement Cost after Renovation
Your Dwelling limit will need to be increased to account for the additional cost to rebuild your home. Some policies do provide Dwelling Extensions or may even provide Guaranteed Dwelling Replacement Cost coverage with effectively no limit. However, all of these policies have wording that says that if you increase the cost to replace your home by a certain amount, usually around $5,000 to $25,000, you must notify your agent/company. If you don't notify your company, the Dwelling Extension or Guarantee does not apply, so in the example above, you would only get $500,000 to replace your $700,000 home.
Most policies also contain a coinsurance provision. This basically says that if you don't insure your home to 80% of its replacement cost value at the time of loss, they only pay you the percentage of the home you did insure. In the example above, if you did not increase your limit, and you had a $100,000 loss, even though you have a $500,000 limit, you would only get about $70,000 for your claim. Since the cost to replace the home is now $700,000, and you only insured it for $500,000, or about 70%, they only pay %70 on a partial loss.
2. Coverage Restrictions:
Almost all Homeowners policies have language that restricts coverage in the event you are renovating or adding an addition to your home. As noted above, the Dwelling Extension or Guaranteed Replacement Cost may no longer apply. Some companies even increase the deductible to 5% of your Dwelling limit, so in the example above with a $500,000 limit, you would have a $25,000 deductible. If you just purchased a new home and a new Homeowners policy, but prior to moving into the home you do a renovation, you may end up with no coverage if you have a claim. The carrier could allege fraud that you did not tell them the house would be vacant and under renovation.
3. Ownership Issues:
Ownership is very important when it comes to Property insurance. Simply put, you must own something to have it covered by insurance. If building materials are stolen from your property prior to being installed in your home, you could have some ownership issues. If you have a contract with your GC that states you take ownership of all materials upon deliver to your home, then they could be covered by your insurance. If you have a contact that states you do not take ownership until they are installed in your home, then you don't yet own them, and they would have to be covered by the GC's insurance. If your contract says nothing about the issue, it is possible that neither insurance pays. Your company may say they weren't yours and are therefore not covered. Your GC's insurance company may tell him the same thing. As I don't like to rely on other's insurance, I would recommend putting in the contract that you take ownership upon delivery, and then make sure you have adequate insurance.
As you can see, having a discussion with your insurance agent prior to your renovation/addition is an important step in the process. Depending on the extent of the work, the Homeowners policy may not be the best way to cover your home. The best solution might be a Builder's Risk policy. These policies are specifically designed to cover properties that are vacant and under renovation or being built from the ground up.
The one drawback to the Builder's Risk policy is that it does not provide any Liability coverage. Most people under estimate the Liability exposures they face when doing a home renovation or addition. As the owner of the home, you are ultimately responsible for anything that happens on your property. For example, if the contractor causes damage to your neighbor's property (the most common claim we have seen), they leave tools or supplies on your property that injure a child, or one of the workers gets hurt while on your property.
Whenever I tell people that they can be held liable for the actions of the contractor, they always respond, "Their insurance would cover that." That is are really big assumption. It assumes they have insurance (despite what they may tell you, many don't), assumes they have adequate limits (most don't), and assumes you did not sign a contract holding them harmless. So in addition to purchasing your own Liability policy, which we highly recommend, there are other steps you can take to reduce your risk. We are not lawyers, and we still recommend you have your lawyer review any contract, but we can help you review the insurance related aspects of your contact. We can help make sure the contract makes it clear that the GC must carrier BOTH General Liability and Worker's Compensation insurance and that they agree to name you as Additional Insured's on their policy. We can also help you verify this by requiring they provide you with a Certificate of Insurance as proof. This way, if your contractor damages your neighbor's home, his insurance will not only have to defend him, but will also have to defend you.Doing a home renovation or addition can cause many gaps in your coverage. The majority of non-weather related Homeowners claims occur when homes are vacant and under renovation, so this is not a time for gaps in coverage. We at Howard & Hoffman Inc. can help you both reduce your exposures and close these gaps.