Insuring a home during a renovation

A renovation raises your home's replacement cost, brings workers and open walls onto the property, and can change how your policy responds to a loss. Tell your insurer before work starts, raise your dwelling limit to reflect the finished value, and verify your contractor's liability and workers' compensation coverage. A kitchen refresh usually needs only a phone call; a gut remodel or addition may need a builder's risk policy or a short-term change to your form.

Why a renovation changes your coverage

Your homeowners policy was priced and limited based on the house as it stood at your last renewal. Adding 600 square feet, finishing a basement or upgrading to custom cabinets and stone counters pushes the cost of rebuilding above the Coverage A limit, even though the policy has not changed. If a fire happens after the work and your limit has not caught up, you carry the shortfall. The dwelling coverage guide covers how the limit is set, and the How much homeowners insurance do I need? can price the finished home.

Renovation also changes the risk. Open roofs and walls let in rain. Temporary wiring, torches, welding and sanding create fire hazards. Workers leave doors unlocked and tools on site. Stored materials attract theft. Insurers know the pattern, and policy language reflects it.

What the standard HO-3 says about construction

The wording below comes from ISO HO 00 03 05 11, the 2011 edition hosted by the Maine Bureau of Insurance. Newer editions and your insurer's form may differ, so check yours.

• Theft from a project. The theft peril does not include theft "in or to a dwelling under construction, or of materials and supplies for use in the construction until the dwelling is finished and occupied." For a remodel of an occupied home that exclusion is aimed at new construction, but insurers sometimes argue it for large additions. Ask how yours treats stored materials, and keep materials inside a locked area where possible.
• Faulty work. The form excludes loss caused by faulty, inadequate or defective design, specifications, workmanship, repair, construction, renovation or remodeling, and materials used in them. If the work was done badly, the policy does not pay to redo it. An ensuing covered loss, such as a fire that starts because of poor wiring, may still be covered; the exclusion text carries an exception for that, and the outcome depends on the facts.
• Collapse. Abrupt collapse is covered when caused by defective material or methods used in construction, remodeling or renovation if the collapse occurs during that work.
• Vacancy. The form says "a dwelling being constructed is not considered vacant." A renovation can therefore keep a house from triggering the 60-day vandalism and glass limits, though a stalled project is a separate underwriting problem. See vacancy and unoccupancy exclusions.
• Belongings moved out. Personal property moved from the residence premises because it is being repaired, renovated or rebuilt and the home is not fit to live in or store property in is not subject to the 10% limit that applies to property at other residences. A storage unit rented during the work should fall under the same carve-out.
• If you must move out. loss of use coverage pays additional living expenses and fair rental value after a covered loss. It does not pay for a stay forced by a planned renovation. Plan and budget that yourself.

Questions to ask your agent before work starts

1. Will my dwelling limit rise with the project, and by how much? Is there an automatic increase for improvements, and how long do I have to report them?
2. Does the policy exclude or limit anything because of construction on the premises?
3. What happens if the house is unoccupied while work is done, and for how long?
4. Do you require notice, permits or inspections for projects above a certain cost?
5. Do I need a builder's risk or similar policy during the work? See builder's risk insurance for a home under construction.
6. Will ordinance or law coverage pay to bring the repaired parts up to code if there is a loss?

An insurer that discovers major work after a loss, such as a basement conversion or a second story, can dispute the claim based on the application. Notice protects you.

Hypothetical example

Say your policy has a $350,000 dwelling limit, set when the kitchen and baths were original. You spend $120,000 on a new kitchen, a primary bath and a screened porch. Rebuilding the home with those finishes might now cost $450,000. If you tell the insurer and raise the limit, a total fire loss is paid up to the new figure. If you do not, the policy pays $350,000 at most, and the $100,000 gap is yours. The point is that the improvement, not the market, determines your rebuilding cost.

Contractor protection: what to verify

Most homeowner problems during renovations come from a contractor's insurance, not your own.

• General liability. Ask for a certificate of insurance sent directly by the contractor's insurer or agent, not handed over as a photocopy. It should show the policy period and limits. If a worker damages your property or a visitor is hurt, the contractor's policy is the first source of payment.
• Workers' compensation. If an uninsured worker is hurt on your property, the claim can land on you. Rules vary by state and by whether the worker is an employee or independent contractor, so ask your state workers' compensation agency or an attorney. Ask your agent how your liability coverage treats workers you hire directly, because the answer depends on the form and the state.
• Additional insured status. Ask the contractor to name you as an additional insured on the general liability policy for the project. Get proof.
• License and permits. Many jurisdictions require licenses for general contractors and trades. Unpermitted work can complicate a later claim, and insurers may raise questions about unpermitted additions.
• Written contract. The contract should define the scope, price, payment schedule, change orders and who carries which insurance.

Be careful with solicitations, especially after storms. See contractor fraud after storms: how it works and how to stop it.

Water, fire and other renovation hazards

Renovation losses are often small and avoidable.

• Water. A contractor cutting into a supply line while the home is occupied can cause a sudden leak. Water damage from a plumber's mistake is often a claim against the contractor first, and your own policy second. Keep the shutoff location clear, and label it.
• Fire. Hot work, space heaters and sawdust are fire starters. Ask whether the contractor follows fire-safety procedures.
• Weather. Open roofs or removed siding need temporary protection. Document what the contractor did.
• Photographs. Take dated photos before, during and after the work. They help establish the home's value and condition.

Mortgage lenders and permits

If you have a mortgage, the lender is a loss payee on your policy. Large renovations funded by a home equity loan or a renovation loan can come with their own insurance requirements, and a lender can require a builder's risk policy during construction. See Home equity loans, HELOCs and insurance requirements and the mortgagee clause explained.

If a loss later occurs on the renovated portion, the claim will ask for permits and records. Keep invoices, permits, inspection sign-offs and photos together. If you are in a state with a renovated-home discount for updated wiring, plumbing, heating or roofing, send proof afterward.

Key takeaways

• Tell your insurer before a significant project starts, and raise the dwelling limit so it reflects the finished home, not the old one.
• The ISO HO-3 excludes faulty workmanship and theft of construction materials until the dwelling is finished and occupied, though it treats a dwelling under construction as not vacant.
• Your homeowners policy does not pay for a stay away from home caused by a planned renovation; budget for it.
• Verify the contractor's liability and workers' compensation coverage with certificates sent by the insurer, and ask to be named an additional insured.
• Large projects, gut remodels and additions may need a builder's risk policy, which your lender may require.