Does Homeowners Insurance Cover Renovations?

It depends, and you may need to bump up coverage limits

Reviewed by Eric Estevez

The amount of homeowners insurance coverage that you should buy depends on factors like your home’s size, condition, and the cost to rebuild it if disaster were to strike. But what if those variables change because you add a deck or update the kitchen?

What added protection, if any, do you need during or after a renovation? Does your existing homeowners insurance cover renovations? If there’s a particular remodel or renovation in your future, how will it affect your coverage?

Here’s what you need to know about renovations and insurance coverage for your home.

Key Takeaways

• Your existing homeowners insurance policy may cover some renovations, but any significant updates and upgrades could leave you underinsured during and after the work.
• Verify that your contractor has adequate liability insurance and workers’ compensation coverage.
• Consider increasing your liability coverage limits for the period of the renovation in case there’s a makeover mishap and/or someone gets injured.
• Speak with your homeowners insurance agent about your renovation plans before you get started to find out if you should increase your coverage.

A Renovation’s Effect on Existing Coverage

Ask yourself, does my current coverage protect me financially against mishaps during a renovation and once that renovation is complete?

In general, standard homeowners insurance policies cover renovations. However, it’s to your advantage to check with your agent before the project gets underway to make sure that you will be adequately covered during and after the renovation. There are two key reasons why this is important:

1. Your existing liability limits may not offer sufficient coverage should someone get hurt during the renovation.
2. A renovation that increases your home’s rebuilding costs could leave you underinsured after the renovation.

Here’s an example. Assume that your home has $200,000 in dwelling coverage. That’s the amount your insurance company would pay toward rebuilding the house for a covered loss—after your deductible, of course.

Now, say that you extensively renovate your kitchen. You use the latest, high-quality materials and add square footage to your home. With the kitchen update, your rebuilding costs are now $280,000.

If you increase your coverage limits based on the new rebuilding costs, you would be adequately covered if something bad were to happen. However, if you don’t update your policy, you could end up woefully underinsured. In this case, your policy would pay only $200,000 of the $280,000 rebuilding costs, and the rest would have to come out of your pocket.

Important

In addition to contacting your insurance agent for feedback, take photos before, during, and after a renovation so you have a visual record of the project. Make sure that you save copies of any contracts and receipts.

Policy Changes To Consider for Renovations

Again, before construction gets underway, ask your home insurance agent if you should update your existing policy. Depending on the details of your renovation, your agent may recommend that you:

• Increase the amount of insurance coverage needed to rebuild your home. The Insurance Information Institute (III) advises you to be prepared to forward your records and receipts to your insurance company so it can accurately assess your insurance needs.
• Increase your liability coverage limits to cover the renovation. Liability coverage helps protect you if someone who doesn’t live with you is injured while helping out with the renovation. This is especially important for DIY jobs (contractors should have their own insurance). The III recommends increasing the amount of no-fault medical protection on your policy. That way, if someone does get injured, they can submit their medical bills directly to your insurance company. The III says this can lessen your chances of getting sued.
• Increase your liability coverage limits after the renovation. If your renovation includes an “attractive nuisance”—such as a swimming pool or hot tub—consider increasing your liability coverage permanently. The III suggests that an excess or umbrella policy is a cost-effective way to increase your overall liability protection.
• Increase your coverage for personal possessions. If you bought any expensive items as part of the renovation, you might need to bump up your personal property coverage limits. Say you build an addition to exhibit a collection of art or comic books—and then add to the collection. Any new, valuable items might need additional coverage in the form of a floater or endorsement. 
• Add dwelling under renovation coverage. Dwelling under renovation insurance protects the building materials at, or en route to, your property. After all, it’s not unheard of for materials to get damaged at, or stolen from, job sites. The insurance also provides coverage for foundation collapse.
• Add vacant home insurance. Depending on the renovation, you might live elsewhere while your house is under construction. If you’ll be away for more than 60 days, consider buying vacant home insurance coverage. That way, if damage occurs and goes unnoticed for a while, you will still be protected.

Confirm That Your Building Contractor Is Insured

According to the III, you should ask to see a copy of your contractor’s insurance policies, including a commercial business/general liability policy and workers’ compensation coverage. (Don’t be afraid to snap a quick photo of these docs for your records.)

Anyone you hire to work on your renovation must be adequately insured. Otherwise, they could sue you if they get hurt on the job. If a prospective contractor can’t (or won’t) verify their insurance coverage, it’s best to find one that will.

Premium discounts of up to 20% may be available for certain types of improvements such as installing a sprinkler system and a fire or burglar alarm that notifies the fire department or police.

A Renovation’s Effect on Insurance Premiums

A home renovation may or may not cause your home insurance premiums to rise.

Potential for Higher Premiums

Projects that increase the value of your home may lead to higher premiums. For example, if you add a room to your house—e.g., a new bedroom, second owner’s suite, or family room—that increases living space, you’ll likely have a higher insurance premium. That’s because the added square footage bumps up the home’s rebuilding costs.

Similarly, renovations that install higher-end materials, such as marble in the bathroom or commercial-grade appliances in the kitchen, also increase your home’s rebuilding costs—and, therefore, your premiums. 

Potential for Lower Premiums

On the other hand, certain improvements could have the opposite effect and result in lower premiums. Say that you replace your roof with sturdier materials, or install shatter-resistant windows and storm shutters.

In these situations, your premiums could actually decrease because your home will be more resistant to storm damage.

Likewise, you might get a discount if you install safety devices in the house (e.g., smoke detectors, dead-bolt locks, a burglar alarm) or if you update the heating, plumbing, or electrical systems.

What does my insurance agent need to know about my renovation?

If you’re planning a renovation to your home, it’s a good idea to contact your agent to let them know. Ask for the information they need to advise you about whether added coverage is or will be needed. This information could include the type of renovation being made, any square footage that will be added to the home, the materials being used (cosmetic and construction-related), the costs of materials, and more.

When renovating, what’s one way to increase liability coverage?

Separately purchased umbrella insurance is one solution. It can kick in with additional liability coverage after the liability coverage of your homeowners policy maxes out. Consider it on a temporary or permanent basis.

Am I required to increase my homeowners insurance after a renovation?

No, you’re not required to do so but it is a smart move to consider to protect yourself financially. If your existing coverage isn’t substantial enough to cover rebuilding your property once a renovation is complete (and having added costs and/or square footage), you’ll have to pay for the shortfall yourself.

The Bottom Line

No matter the type of renovations you make, your existing coverage limits may be too low to cover you during and after the work. Be sure to talk to your insurance agent before construction starts to find out if your existing policy will provide the coverage you need. If it does not, update it before any work begins. And if the renovation turns into a bigger project along the way—you decide to add that hot tub, after all—keep your agent updated.

Read the original article on Investopedia.