Home Insurance and Home Renovations: What You Need to Know
While the pandemic-fueled renovation boom has cooled off a little, millions of homeowners are still actively looking to fix up their homes. One recent survey found that over half of U.S. homeowners intend to renovate their homes in 2023.
For some, it’s a necessity; many recent home buyers bought fixer-uppers that need major work before they’re comfortable. Others may just be trying to maximize their home’s sale price. Unless you’re selling to a company that buys houses for cash, today’s selective buyers want to see updates and modern features.
But what many homeowners don’t know is that their renovations will almost certainly affect their future home insurance premiums— and that they may have serious liability exposure during the renovations themselves. Let’s cover some of the most pressing issues related to home renovation and your home insurance.
If your renovation increases your home’s value, reassess your coverage
A big part of how your home insurance premiums are calculated is by estimating how much it would cost to rebuild your home. If your home would cost $400,000 to rebuild from scratch, that’s how much your home insurance payout would be, minus your deductible, in the event of a claim.
This is based on your home’s appraised value, which you can check on several trusted home value websites. (As an aside— if you find that your home’s online value is inaccurate, which is a common occurrence, you should take steps to have it corrected.) Your home’s appraised value is a big factor in everything from your home insurance premiums to your tax bill, so it needs to be as accurate as possible.
However, let’s say that your renovation adds a new bedroom suite to your home. Post-renovation, your home may now be worth $520,000. If you don’t increase your home insurance coverage, you’ll be significantly underinsured. If something catastrophic happened to your home, you’d only receive $400,000 to rebuild, with the rest of the cost coming straight out of your pocket.
Some home additions will necessitate different insurance coverage
Put in a new swimming pool, which is one of the most common home improvement projects. You’ll have to pay higher home insurance premiums not only because you’ve increased the value of your property, but also because you’ve increased the risk of injury or drowning. (Insurance companies classify swimming pools as “attractive nuisances,” which says a lot.)
Another example of an addition that might necessitate more insurance coverage is a home office. This is becoming more common in the work-from-home era, as more people work full-time out of their homes.
While most homeowners’ insurance covers a small amount of business equipment (usually around $2,500), home-based business owners with a lot of expensive, specialized business equipment should probably increase their coverage. This could take the form of a simple addition, or endorsement, to your existing home insurance policy, or as a separate home business policy that offers more comprehensive terms. As always, speak to your home insurance agent to talk about a policy that meets your specific needs.
Have adequate coverage during the renovation
Construction comes with certain risks. While your contractor should have their insurance policies, you’re still somewhat exposed.
One way to protect yourself during the renovation is to purchase a separate umbrella policy to give you additional liability coverage. If someone is injured during the renovation, and they aren’t covered by the contractor’s policy, this will give you an extra layer of protection.
Something else to think about is purchasing “dwelling under renovation” coverage. This policy covers the building materials while they’re at or on their way to your property. (Incidentally— if you’re buying your construction materials, some credit cards offer price discounts.) It also protects you from foundation collapse during renovations.
If you’re living somewhere else during your renovations, consider vacant home insurance. This protects you from damage to your home while you’re living elsewhere. However, your home may not be officially considered vacant until you’ve been living elsewhere for 30-60 days— talk to your home insurance agent about the specifics.
Make sure your contractor has adequate coverage
The contractor handling your renovations should have their commercial business insurance policy, workers’ compensation, and general liability coverage. Ask to see copies of their policies before work starts and, if you want to be extra careful, ask for copies of them.
If an uninsured contractor or handyman is injured on the job, they could sue you for their medical bills and lost wages. Similarly, if they don’t have liability coverage and end up damaging a neighbor’s property while performing your renovations, you’ll be the one liable for damages.
Some renovations could lower your home insurance premiums
Now for the good news: some renovations could lower your home insurance rates. Updates and upgrades that make your home safer will often convince your insurance company to give you a break on your premiums since you’re reducing their risk.
A new roof is one prominent example. Many insurance providers use a depreciation schedule that’s based on how old your roof is to decide how much coverage you’re entitled to. A newer roof is less depreciated and will qualify for better coverage.
If you live in a state that has a high risk of extreme weather, like hail, hurricanes, or high winds, a newer, more resilient roof could reduce your home insurance premiums. Measures like impact-resistant asphalt shingles, waterproofing, super-durable metal roofing, clay roofing tiles, hurricane straps, or even storm-resistant or shatterproof windows can all improve your home’s risk profile.
Other renovations that could lower your home insurance premiums include upgraded plumbing or wiring— especially if you currently have old, outdated systems. In a similar vein of risk reduction, measures like sprinkler systems will guard against fire damage, and security systems reduce your chances of a costly break-in, and can both reduce your home insurance bill.