While staying home during this year of the Corona virus many people are recognizing all the improvements and updates their home needs. That need is keeping contractors very busy. The difficulty getting a good contractor has many embarking on a variety of home renovations themselves. It is important to know that those renovations may have insurance issues to consider.
On the positive side, some renovations will often lower your homeowner insurance costs. Most homeowner insurance rates reflect cost differences for a home that is new, 15-20 years old, or 100+ years old. But for any of those homes 15 or more years old, if you can show that the plumbing, heat, electric and roof have been replaced or significantly updated within the last 20 years, then you will likely be eligible for a “renovated home credit” that maybe worth up to a 20% discount.
When planning your addition or home improvements, you should consider how the improvements will affect the value of your home. Keep in mind that your home should be insured for its “replacement cost” vs. the amount it might sell for today (commonly known as the “market value” or “real estate value”). If your changes are simply replacing or updating features of your home, your replacement cost may not increase. Such changes include replacing your oil tank, converting copper water pipes to pecks plastic tubing, or replacing windows. These may increase the resale value of your home but will not significantly impact the replacement value of your home. On the other hand, installing solar panels on your roof, constructing an addition, or adding a garage will surely both increase your home’s real estate value and the cost to replace your home.
Two good examples of renovations or additions impacting your homeowner’s insurance involve installing solar panels. Two of my insureds have installed arrays of solar panels; one installed them as free standing structures in their back yard while the other installed them on their home’s roof. The cost for each was about $40,000. Adding them to the roof increased the replacement cost of their home while the array in the other insured’s yard increased the value classified as “Other Structures” on their policy. The standard home owner policy includes 10% of the home’s replacement cost as the limit for “Other Structures”; if the collective value of any structures not attached to your home exceeds the automatic 10% provided, then you need to increase that limit.
Some renovations or additions may not be the wisest activity to embark on as a do it yourself or handy man special project. Generally, a finished DIY project will be covered for all of the common perils included in your homeowner policy whether you do the work or hire a contractor to do it. Be aware though that your policy has a clause which allows them to deny a claim for damage resulting from faulty design or defective workmanship. If you do the work yourself and later discover a problem, your insurer may decline the loss.
If you hire a contractor and there’s a problem, the contractor is responsible to fix any problems that arise. If they fail to take responsibility for the repairs, you then have the ability to go after their insurance for the faulty workmanship; that is if the contractor has insurance.
Insurance is an expensive cost for a contractor to do business. By not purchasing insurance, your contractor’s rates may be well below their competitor’s proposal: but “you get what you pay for”. Avoid simply assuming that your contractor has insurance or taking their word for it. It is very common to ask your contractor for confirmation that they have liability and workers compensation insurance. The best proof of this coverage comes from them providing you with a “certificate of insurance”. That is a document that is prepared by your contractor’s insurance company, or their insurance agent as a representative of that company. The certificate should come listing you as the certificate holder noting their policy limits and the effective dates for the policy.
If constructing a new home or addition you should consider taking out a “Builder’s Risk” policy. It is a policy that covers the liability you could incur from the hazards of operating a construction site. It could be as common as someone injured while visiting the site or damage one of the contractors causes to the project that is not being covered by their insurance. With all the individual contractors your project involves after a situation arises, the finger pointing can be avoided by such a policy. There may be some duplication of coverages provided but where ever gaps exist, the builder’s risk policy fills those voids.
So what if you’ve already completed that project; are there any insurance needs you should be considering? A simple caution is to examine the impact did your work has had on the replacement cost of your home? If you fail to insure your home to at least 80% of its full replacement cost, at the time of a loss you could face a penalty when trying to settle a claim. Your insurance company is not going to pay the full cost to replace your home after a loss if you have not been paying the premium associated with replacing your home. Even if your loss is only a few thousand dollars, they will still reduce your pay out as a penalty for not insuring your home to its full replacement cost.
Last point, if you’ve added an addition to your home, you likely filled it with new furnishings. Do you need to increase your “contents coverage” (also known as “Personal Property Coverage”)? If you took the step to increase your home’s insured value already, you may not have to increase the value of your contents coverage. Standard policies include 50-70% of your home’s insured value for personal property coverage. You want to confirm, first, whether your contents are covered for their Replacement Cost or on an Actual Cash Value basis. Second, that your contents limits are sufficient to pay for the replacement of all of your personal property. A new 48 inch TV costing $500 today is its replacement cost but a 10 year old TV has a nominal “actual cash value” since the average life of a TV is 10 years. The cost to replace everything in your home adds up very quickly. A limit that is 50% of your home’s value may not be enough for you.