Homeowners love to change things up. Whether it's rigging a new home theater in the basement, transforming unused attic space into a spacious bedroom, or adding a luxurious in-ground pool area complete with fountains or a hot tub, home renovations are exciting.
But with all these new changes, how exactly does your insurance change? How will you know if your new bathroom will add more value than that extra deck you put on?
“Any project that adds/increases the footprint or square footage of the home needs to be shared with the carrier,” says Jesse Morado, CR, executive director of the National Association of the Remodeling Industry's (NARI) Atlanta chapter. “Finishing areas within the footprint such as basements or attics that are becoming living areas need to be brought to the agent's attention.”
If you're about to undertake a major renovation with seasoned team, they will be able to give you pointers. Most contractors will alert homeowners to potential policy changes they will need or even any riders they might want to put in place during the construction process, says Morado. If you are doing all the renovations yourself, you'll need to be extra diligent. Check with your agent and make sure you follow all the local permit requirements.
“When we calculate the replacement costs, it is of the living area, an unfinished basement, and an unfinished attic,” says Nathan Troutman, CIC, CWCA, AAI, a commercial insurance agent with Keystone Insurers Group in Northumberland, Pennsylvania. “If you make that addition, that's great, but that increases the replacement of the square footage. Then it's time to make that simple phone call to your agent.”
Surprisingly, even major renovations like a kitchen might not impact your home value as much as adding more square footage, says Troutman. Insurers focus on replacement costs, so even an older bathroom, if damaged, would be replaced with new materials. If you add those new materials with a renovation, you'll have a great new space, but it won't typically change the replacement value of your home significantly (unless you are replacing with precious gems and 24 karat gold!).
What are some typical renovations that might trigger insurance changes? Expanding the living area by renovating a previously unfinished space will increase the replacement value of your home as will adding square footage like an addition. But as Troutman points out, even if the additions do not significantly increase the market value of your home, they will increase the replacement cost so your insurance requirements will change. As your insurance company's business concerns replacing your home and not selling your home, homeowners can't use the two terms interchangeably. You might be able to sell your home for $200,000, but it will cost significantly more than that amount to replace the home and its contents if they are lost in a disaster.
Adding Living Space
Renovating a basement is a little trickier. You aren't adding square footage, but you are adding new living space that probably will have some new contents – like new furniture and a television. Since basements are prone to all kinds of water damage, you might consider a few additional protections. If you're in a flood zone, flood coverage typically doesn't cover contents, but it will cover the systems and equipment that help your home function, says Troutman. You might get coverage for your electrical box, but not always for a new couch.
But because water from clogged or burst pipes in the home will likely flow to the basement, Troutman says it's worthwhile to ask your agent about back-up sewers and drains protection. The policy is typically an upgrade, but should help mitigate costs of a water event that isn't caused by Mother Nature.
What about outside renovations like adding a pool or a new three-season porch?
Considered an attractive nuisance, pools add both value and a potential liability. “Pools are pretty standard,” says Troutman. “The contractor will put in an appropriate fence and the appropriate child proof latches, but it does increase your potential liability.” Make sure your insurance agent is aware of what is being put in and that all work is done according to your local permitting regulations as well.
A three-season porch or even a deck adds square footage to your home's footprint, so that will likely require an upgrade of your insurance coverage, too.
Renovations aren’t just about insuring the final product, either. Morado recommends ensuring all workers on your property are covered by workers' compensation during the construction process in case they are injured. Also verify that your builder has proper insurance to cover the cost of the home. “A $300,000 policy with a $1 million cap may not be enough for a $3 million home,” he says. Finally, Morado recommends that homeowners ensure a builders risk is in place to cover materials and work in case of theft or fire.
Renovations bring years of enjoyment and increase homeowners' satisfaction with their homes. To make sure the home upgrades are covered, check into getting an upgrade to your insurance policy, too.