When planning a home renovation, your to-do list may contain items like “get quotes from contractors” and “decide on a floor plan.” Something you should add to your list, though, is “call my insurance company.”
Why? Because renovations often change the coverage that you need, and even during the renovation process, you will want to consider augmenting your insurance to provide coverage for the worksite.
When homeowners insurance covers renovations
If you are planning a small renovation — perhaps some new paint and a set of built-in bookcases in your living room — your homeowners insurance may not be impacted.
But anything larger than that, from a kitchen remodel to adding a second story to your home, changes your home’s overall value. Your insurance dwelling coverage is based on your home’s estimated rebuild value. Significant remodeling adds to that value, meaning that you may not have enough coverage after the remodel.
For example, consider a home that is insured for $200,000. The owner upgrades the kitchen: new appliances, granite countertops, custom cabinets — the works. The home’s rebuild value is now $260,000. If a disaster such as a fire destroyed the home, that $200,000 in coverage would not be enough to restore the house to its former condition.
Types of renovations that affect homeowners insurance
The type of addition or renovation you make on your home will impact the rate at which your insurance needs change. In general, anything that increases the value of your home will indicate a need for more insurance coverage, and the corresponding higher premiums that go with it. But that’s not always the case.
Adding an addition that increases your home’s square footage will undoubtedly increase your home’s value since square footage is one of the primary factors used in determining value. Building a family room on the back of your home, for example, or adding a dormer that increases the space on the second floor, will all add value to your home.
The right time to call your insurer for a home addition is when you are still in the planning stages. Once you have the architectural drawings nailed down, call your insurance representative and let them know what you’re planning. They can review the probable premium increase so that you are fully aware of your costs post-renovation.
Renovating a kitchen, bathroom or other space in the house
Although this type of renovation doesn’t increase your square footage of living space, it probably upgrades it. Most interior renovations are designed to get rid of old, outdated elements and replace them with new ones. If you have not done it before this, now is a good time to ensure that your policy includes replacement cost value rather than actual cash value. The former may cost more but will provide additional protection for higher-grade home elements.
Adding a pool, sauna or hot tub
Although these elements can give you a great deal of satisfaction while adding value to your home, they are also a liability hazard. It’s not hard to see how someone might be hurt — or worse — and insurers need to protect themselves from liability claims when you install one by raising your premium. Your insurer may also require you to install a fence or night-time lighting around any water feature you have on your property.
Updating the roof
Here, we have some good news for you. Replacing your roof does add value to your home, and may impact your premium rate, but many insurers provide discounts for a new roof. If you live in a coastal area frequented by hurricanes or wind storms, there may be further discounts if you choose damage-resistant materials for your roof. The result? You may see your rate decrease when you install a new roof on your home. The same is true if you install new locks or tamper-proof windows. Ask your insurance agent if there is a discount for these items.
Adding a home office
If you are running a business out of your home and either renovate an existing space or add on to your home’s footprint, you may have additional insurance-related concerns. If you will have people coming and going in the space, you will want to increase your liability and purchase additional coverage to ensure you’re properly covered. The same is true if your business requires you to keep expensive inventory or have professional-grade machines on your property. In-home business insurance costs about $300 a year and provides protection that your regular homeowners policy does not.
The cost of home renovations
Your homeowners insurance increase will depend on the increased value of the home due to the renovation. The tricky part is that your home’s value is not based on the market value — which is the price you paid for it or the price it would get on today’s real estate market.
Insurers use a different value — a calculation determined by multiplying your home’s square footage by the cost-per-foot of construction in your region. This includes looking at what it would cost to replace your home in your neighborhood with similar quality materials. Any high-end finishes and top-of-the-line materials your home has are factored into calculation costs as well.
Thus, your home might be worth $200,000 on the market, but your insurer could still recommend that you insure it for $275,000 if construction costs are high. If you insured the home only for the market value, you would find yourself underinsured if the home were destroyed or damaged.
A handy tool to use when you’re determining your insurance value is an ITV (insurance-to-value) calculator, which is used by industry professionals to determine if a home is adequately insured. A home that is insured at 80% or more of its ITV is considered to have replacement cost coverage.
How to ensure coverage during renovations
Although it is important to take a good look at your insurance needs in your renovated home, that is not enough. You should also consider your insurance needs during the renovation, which may be different from your normal insurance needs. Here are some reasons why home renovation insurance is important:
- One-third of house fires are caused by construction professionals during renovations and new builds. Because of fire, theft and the other hazards to a home during construction, your insurer may add a temporary dwelling under construction rider to your policy to cover contingencies.
- If you have to leave your home and live elsewhere during the renovation, it’s more likely to be broken into, or suffer from vandalism or other disasters. If you are away from your home for more than 60 days, a vacant home policy can protect your investment in your property.
- If you are doing the remodeling yourself or in conjunction with friends or family, talk to your agent to ensure you’re properly covered for liability and medical payments coverage. Most contractors have their own coverage if one of their workers is injured on the job. If you are working on it yourself or with other non-professionals, the right coverage is vital.
In general, during construction your homeowners insurance should cover you for any faulty work or defective materials used in the building process. It is worth double-checking this with your insurer before work starts to be sure you are covered.
Frequently asked questions
What is the best home insurance company?
There is no one “best” company that is right for everyone. A good strategy for finding the company that’s the best fit for your circumstances is starting with our Best Homeowner Insurance Companies of 2020. These are the companies with the highest consumer satisfaction ratings and best rates across the board.
Am I required to increase my homeowners insurance after a renovation?
You are not legally required to increase your coverage, as you might be if you bought a new car. But if you fail to increase your policy’s limits, you run the risk of having inadequate finances to rebuild if a disaster were to happen to your home.
I’m building a garage at my home — do I need to increase my coverage?
Probably. If the garage is attached to your home, it would be covered by your dwelling insurance, and you should go over your home’s insurance value with your agent to determine if you need an increase. If it is a detached garage, other structures coverage will cover it up to 10% of the dwelling coverage limit against named perils.