If you are doing a large renovation or addition to your existing home, you will obviously need to report the increase in values at completion. But what type of insurance is needed during the course of construction? The answer may depend on from whose perspective you view the risk.
Contractor Perspective
If you have a contractor doing the renovation of addition, they may carry a builders’, risk policy or an installation floater policy on the values of their work. This type of policy insures not only the materials, but also the labor and profit associated with the project. This protects the contractor, but these policies typically have an exclusion for the existing structure, so your home is not insured under these programs. The contractor is covered for his interests, but you may be left in the cold at claim settlement time. Since you are not the policyholder, you do not have any control over the claim process or have any ability to influence coverage terms and conditions. Ask to be named as an additional insured on the contractor’s policy. If possible, obtain a copy of the policy declaration page and share that with your insurance agent. The dec. page will have form information so a review of policy terms could be undertaken on your behalf.
Homeowner Perspective
Option One – Existing Homeowners’ policy
You can report increased values to the insurance company at the beginning of the project. This would seem to offer the homeowner coverage on the same terms as the existing policy during the course of construction. This is a practical approach if your insurance carrier blankets coverage for real and personal property. In this case there will not be a gap for the difference between real property values and personal property values.
If your policy has separate limits for real and personal property, reporting these values is the complicating factor. If you report all of the values as an increase in building value, you may create a coverage gap. The gap in this coverage may be for materials that have been ordered and not yet installed. If your custom woodwork or materials that are off premises are stolen or destroyed, you may not have coverage for off premises materials.
You would need to cover the project by separating items between real property and personal property to have off-premises coverage. Since installed materials would then be considered building values, this is a difficult balancing act. It would require significant recordkeeping; multiple policy changes and your personal lines carrier may not be happy with the extra processing. Their displeasure may be expressed at renewal.
In either case, covering the course of construction on a homeowner’s policy will also highlight the change in risk when construction activity is underway. Some insurance companies see this as a significant increase in risk and will apply a surcharge to your homeowner’s policy for the duration of the project. We have seen surcharges approaching a 100% increase in premium for the term of the project. In addition to an ongoing accounting and value endorsement process, you will be paying a substantial cost for this coverage. Understanding this additional cost is important to evaluate if a separate builders’ risk policy would be advantageous.
Option Two – A Builders’ Risk Policy
We always recommend to our clients that they place the builders’ risk or installation floaters for thier property. This way we know the terms and conditions of each program and can have some control and input to the claims handling process. You may be able to secure a builder’s risk policy from your homeowners’ carrier. It will be from another part of the company but would allow better coordination of coverage and claims handling. If your personal lines insurance carrier does offer a builder’s risk or installation floater, consider a monoline inland marine carrier.
There are monoline renovation inland marine forms that would allow you to insure the existing building during the course of construction. You would need to keep your homeowners in place for contents coverage, but you may find the premiums to competitive and the coverage more comprehensive that trying to adjust your building and contents limits on a homeowners’ policy during the project term.
A monoline policy may be subject to a minimum premium charge. Knowing the potential upcharge for your homeowner’s policy will allow you to determine if the minimum premium charge is cost competitive.
The Driehaus Difference
We have helped our clients navigate these scenarios and can help you make the best choice for coverage and cost. There is not a one size fits answer to this situation. The ongoing construction process needs to be properly insured and the cost effectively controlled. We have learned this and can use our experience to protect your interests. We want to be your insurance provider, so call us at 513-977-6860 or contact us online at www.driehausins.com
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