How to insure a home during renovation

A homeowners policy is written for a finished house that people live in. A renovation changes three things the policy depends on. The building is partly open, so wind, rain and fire can do more damage than usual. People who are not members of the household are working on the property, some of them with power tools on ladders. And the house is gaining value every week while the dwelling limit on the declarations page stays where it was. If the family moves out while the work is done, a fourth change follows: the house may no longer count as occupied.

None of this is a reason to avoid a remodel, and a small project may need no insurance change at all. A kitchen gut, an addition or a whole-house renovation usually does. This guide explains what to check before the work starts, during it, and when it is finished, for homeowners in Arizona, Nevada, Utah and Idaho.

What to gather

Collect these before the contractor mobilises.

• The signed contract or bid, with the total contract value, the scope of work, and the start and expected completion dates.
• The contractor's state licence number, which can be looked up with the licensing authority in each of the four states.
• Certificates of insurance from the general contractor for general liability and workers compensation, and ideally the same from major subcontractors.
• The building permit and the plan set, since permitted work is what the carrier will expect.
• Your homeowners declarations page, with the dwelling limit, any extended replacement cost percentage, and the ordinance or law limit.
• Whether you will live in the home throughout, move out for part of it, or leave it empty.

Step one: tell the carrier what is happening

Call the carrier or agent with the scope, cost and schedule before work begins. Carriers vary widely here. Some are content to keep the homeowners policy in force for a kitchen or bathroom remodel with the family living in the house, and simply want the dwelling limit raised when the work is done. Some require a builder's risk policy for any structural work or addition. Some will not keep a homeowners policy on a house that is substantially gutted, and a few restrict coverage while any construction is under way. The only way to know which applies is to ask, and the answer should be noted on the file.

Two parts of the standard homeowners form deserve particular attention. The theft coverage in the common special form excludes theft in or to a dwelling under construction and theft of materials and supplies for use in the construction until the dwelling is finished and occupied. And the vacancy condition can restrict coverage if the house is left empty for an extended period, which a family living elsewhere during the work may trigger.

Step two: decide whether builder's risk is needed

Builder's risk insurance covers a building while it is being built or substantially renovated: the work in place, materials on site and often in transit or storage, and, on some forms, soft costs such as extra interest if the project is delayed by a covered loss. For a renovation, it is typically written for the value of the project rather than the whole house, and sits alongside the homeowners policy, which continues to cover the existing structure. On a major gut or an addition, the carrier may require it; on a lender-financed renovation, the lender often does.

The contract should say who buys it. Some general contractors carry builder's risk for their projects and name the owner; others expect the owner to buy it. If neither party does, the new framing, windows and cabinets may not be covered by anyone until they are installed and the house is occupied. Read the contract's insurance clause, and if it is silent, settle the question in writing.

Step three: make the contractors carry their own risk

When a worker is hurt on your property, the first question is whether the contractor has workers compensation. If it does, the claim goes there. If it does not, the injured worker may look to the homeowner, and a homeowners policy's liability coverage may not respond to an employee-type injury, particularly where the homeowner hired the worker directly. In Arizona, Nevada, Utah and Idaho a contractor with employees is generally expected to carry workers compensation; a sole proprietor with no employees may lawfully be exempt, which is worth knowing before a helper is added mid-job.

Ask for certificates before work starts and read them. The general liability should be in force for the project dates, the workers compensation policy should be active, and, for a larger project, the contract can require the contractor to name the homeowner as an additional insured, so that the contractor's policy defends the owner if the contractor's work injures a neighbour or damages the house. Ask for the endorsement itself, not only the certificate, because the certificate alone creates no coverage.

Step four: update the policy when the work is finished

When the house is complete and the family is back in, call the carrier again. Raise the dwelling limit to reflect the new rebuilding cost, including the addition's square footage and the higher grade of finishes, because a limit set for the old house will underinsure the new one. Report new systems such as a replaced roof, new electrical panel or plumbing, since they can lower the premium. Cancel any builder's risk policy, and add scheduled coverage for high-value items installed during the work if the contents limit no longer fits. Keep the permits and final inspection sign-offs with the policy records; unpermitted work can cause trouble at claim time and at the next sale.

Common mistakes

The following cause most renovation-related coverage disputes.

• Starting a major remodel without telling the carrier.
• Assuming the homeowners policy covers theft of lumber, appliances and fixtures stored on site during construction.
• Hiring an unlicensed or uninsured contractor to save money and absorbing its liability.
• Leaving the builder's risk question unanswered in the contract.
• Moving out for months without checking the vacancy condition.
• Forgetting to raise the dwelling limit after an addition doubles the rebuilding cost.

A worked example

Suppose a couple in Mesa hires a general contractor to add a 600-square-foot primary suite and redo the kitchen for $200,000, while living in the house. Their carrier keeps the homeowners policy in force but requires builder's risk for the addition, which they buy for $1,200 for a nine-month term with a $200,000 limit. The contractor provides certificates showing general liability and workers compensation, and the contract names the couple as additional insureds. In month four, $15,000 of cabinets and appliances delivered to the garage are stolen; the homeowners policy excludes theft of construction materials, but the builder's risk policy pays the loss less its $1,000 deductible. When the work ends, the carrier raises the dwelling limit from $450,000 to $600,000, which adds $500 a year to the premium. The figures are hypothetical; the builder's risk policy and the updated dwelling limit are what kept the new value insured.

How to use this

Before a renovation starts, send us the contract, the contractor's certificates and your declarations page. We will tell you what your current carrier requires, whether builder's risk is needed, and what the dwelling limit should be afterwards, comparing options across the carriers we represent in Arizona, Nevada, Utah and Idaho. For a small project where no change is needed, we will say so.