Insuring Home-Improvement Success

When you're planning to spend thousands of dollars on home improvements, the last thing you want is for your investment to go down the drain. For that reason, it's crucial to make sure you've taken all the necessary steps to insure your project before you begin.

Step one: Contact your insurer
Major renovations can leave your home exposed, physically and financially. Those brand new French doors could be stolen before they can be installed. Major roof work might leave your home exposed to the elements, some of which might not be covered under a regular homeowners policy.

In such cases, adjust insurance coverage temporarily. "During construction, there may be some kind of insurance rider just in case there's an accident or something that protects you in addition to your insurance coverage," says David Lupberger, a home-improvement expert for ServiceMagic, a company that matches contractors with homeowners. Talk to your insurance agent about what you're planning to do, and he or she can guide you through short-term coverage options.

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Step two: Find an insured contractor
When hiring a contractor, check to see if that person is properly insured. "Make sure they have workman's compensation for their employees and have general liability insurance for the company," says Lupberger. "What that means is that when a professional contractor is working on your house, if a worker is injured, you're not liable. If the contractor damages something, destroys something or burns your house down, you're protected."

Likewise, if something happens to the contractor's tools or equipment while the project is being completed, his insurance will pick up those costs as well. Uninsured contractors may charge you less for the job, but you'll pay the price if something goes wrong during the renovations. And even if a contractor tells you he's insured, don't just take his word for it. "Have the contractor show you a certificate of insurance," Lupberger says.

What if you decide to do the project yourself? "In that case you don't so much have a liability or a third-party liability issue," says Richard Standring, program manager for risk management advisory services for Fireman's Fund Insurance Company. As a result, there's no need for workman's compensation or general liability insurance. But, depending upon the scope of the project, your insurance agent may suggest that you hire a professional instead. "We would never recommend that a policyholder go out and do any type of work that would require a license, especially around an electrical or plumbing system," says Standring. Also, if you damage your property in the process and your insurance provider determines that your negligence caused the mishap, it might not pay the claim.

Step three: Get building permits
Some jobs require building permits, particularly if the structure of your home will be changed. In these instances, work must adhere to building codes. Your city or county government can tell you if your project is under this category. If so, have the contractor apply for the permits. Once the job is done, a building inspector will inspect the work, says Carolyn Gorman, a vice president with the Insurance Information Institute.

If the work fails the inspection, the contractor is liable and has to make adjustments. Incompetent builders can have a tremendous effect on your home's coverage. If you add a room to your home and it does not meet building codes, your insurer could refuse to cover it.

Step four: Estimate the project's worth
Every home improvement project need not warrant a change to your home insurance policy. If you buy a new refrigerator, change one or two appliances or upgrade one of the bathrooms, there's probably no need to make revisions. "But any time you're investing more than $25,000 back into the value of your home, your insurance company should really be on notice of that change," says Standring. If unsure, err on the side of caution and check with your agent anyway.

Step five: Review your policy
Once the project is complete, your insurer can help you determine how much value the work has added. This information is crucial: You want the homeowners policy to reflect the new, upgraded value of your home. Say your home is insured for $200,000. Add an expensive addition but fail to revise the policy, and it's like the work didn't happen. If your house burns down, what proof do you have of any improvement work?

"When it's time to rebuild, your insurer is not going to give you any more than $200,000 because that is the policy limit," says Gorman. There is an exception to this rule. If you have an extended replacement cost policy, it pays a certain percentage -- generally 20 percent to 25 percent -- over the limit to rebuild your house. While such a policy would cover minor renovations, you will no longer be adequately covered if you increase the value of your home by more than 25 percent through the improvements you've made.