When existing homeowners insurance covers renovations

While homeowners insurance won’t cover new renovations directly, your existing home insurance policy will likely need to be adjusted following the completion of your 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 larger renovation projects, from a kitchen remodel to finishing your basement, change your home’s overall rebuild value. The dwelling coverage listed on your homeowners insurance policy is based on your home’s estimated rebuild value. Remodeling can affect that value because it is determined by your home’s characteristics, such as square footage, finishings, number of bathrooms and roof type.

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, $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 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.

Home additions

Adding an addition is a major renovation project that increases your home’s square footage and will undoubtedly increase your home’s value since square footage is one of the primary factors used in determining your rebuild 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 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 improvement projects such as upgrading your kitchen or bathroom don’t increase your square footage, they can still affect your homeowners insurance policy. Most interior renovations are designed to get rid of old, outdated elements and replace them with new ones. The grade or type of the items used in places like your kitchen and bathroom are usually questions your insurance agent will ask when helping calculate the estimated rebuild of your home. If you have upgraded these rooms, it’s worth a call to your property insurer.

After these renovations, you may want to consider replacement cost value rather than actual cash value if your policy currently does not have this coverage. The former may cost more but will provide additional financial 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

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 primarily work from home and find yourself needing a dedicated home office, this renovation project may affect your insurance policy. For example, running a business out of your home where people are coming to your property increases the risk of a liability claim. Because of that, your standard homeowners insurance policy may not provide business-related claims that occur on your property. In addition, if you are storing items on your property that are primarily for business use, your policy might have limited personal property coverage.

The cost of home renovations

The change in homeowners insurance will depend on the increased insurable dwelling 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 replacement cost 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 could find yourself underinsured if the home were destroyed or damaged. On the other hand, if the seller’s market is hot and your home’s market value is significant due to demand, your dwelling insurance coverage could be lower if the estimated rebuild of your home is less than the sellable amount.

A handy tool to use when you’re determining your insurance value is an ITV (insurance-to-value) calculator, which industry professionals use to determine if a home is adequately insured.

How to reduce risk 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 differ from your normal insurance needs.

• Additional riders may be needed.  The estimated number of fires in structures under construction has increased since 2014, according to the National Fire Protection Association (NFPA). Because of fire, theft and the other hazards to a home during construction, your insurer may need to add a temporary dwelling under construction rider to your policy to cover contingencies.
• A new policy type may be needed. If you are completing a major renovation that requires you to leave the home and live elsewhere for an extended period, you may need to update your policy to a vacant home policy, which can protect your property while you are away.
• Review existing policy limits. If you are doing the remodeling yourself or in conjunction with friends or family, talk to your agent about any limitations with your personal liability and medical payments coverage. If you are hiring a contractor, most of them have their own coverage if one of their workers is injured on the job. However, you will want to confirm this before any work starts. 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. What is also important to remember is completing work that adheres to safety standards is crucial. If renovating your plumbing or electrical, for example, following the right guidelines is necessary to reduce the risk of your property not being covered in the event of a claim.