When Your Insureds Remodel Their Homes, You Should Remodel Their Coverage

One in three American homeowners have recently remodeled their home or are planning to do so within the next year. That could make for a lot of financial risk exposure, according to a recent study commissioned by the Independent Insurance Agents of America.

One in four home remodeling projects increases the value of a home by more than 25 percent, but too few consumers consider increasing their homeowners insurance limits to reflect their home’s increased value. And most homeowners are unaware they should make sure the contractor making those improvements has sufficient coverage. Those were the findings if IIAA’s phone survey conducted by International Communications Research in Media, Penn., the first week of March 2000.

A study updated recently by Marshall & Swift seems to compound that problem, showing that 70 percent of American homes are underinsured by an average of 29 percent. Making certain your insureds have adequate coverage, particularly when they’re remodeling is just a matter of communicating with insured and keeping copious records, according to the experts.

Update your insureds’ coverages
Madelyn Flannagan, IIAA assistant vice president of research and development, said the most important thing agents can do to protect their insureds during remodeling projects is stress the importance of updating their coverage.

“Agents should advise their insureds off that at the onset of the policy,” Flannagan said. “That communication is most important because the consumer doesn’t know that they need to let the agent know.” Agents should also be certain to ask insureds at the time of renewal about any work they may have done on the house over the last year. Flannagan also advises sending letters during the coverage period to remind them of the importance of updating their policy should they make any changes.

Nearly 60 percent of the homeowners surveyed who recently made major structural changes to their homes, such as bathroom or kitchen remodels, room additions, new decks or patios, had not updated their policies. And 75 percent of those surveyed who had plans to remodel in the near future said they had not thought about updating their policy.

“The investment is considerable, in most cases more costly than a new car,” Flannagan said. “While few people would question the need to adjust their auto insurance if they were to trade up from a compact car to a luxury sedan, many fail to see the importance of safeguarding a significant investment in their home.”

Most insurance companies require homeowners to insure their home to a minimum of 80 percent of its replacement value to be eligible for full coverage. If coverage falls below that level and the homeowner experiences a loss, they will be penalized with a partial settlement-often thousands of dollars less than the actual cost to replace the damaged property. A homeowner with a total loss, an outstanding mortgage and a home equity loan could easily go bankrupt in this case.

Basic protection
On top of that, the survey also sound that many homeowners are not taking basic steps to protect themselves from losses while work is being done on their homes, regardless of who is actually doing the renovation.

Approximately 42 percent of homeowners employ a remodeling firm or independent contractor, and four out of five said they assume their contractor’s liability insurance will cover them during the renovation. Fewer than one in three homeowners surveyed remembered to ask for proof of insurance. Even when the contractor volunteered insurance information, nearly two of three homeowners had no idea whether their contractor was insured.

“Agents should make sure the homeowner knows to work with the contractor to get certificates of insurance,” Flannagan said. “A builders risk policy for large renovations could also be a wise choice.”

Another matter in which agents can be very helpful to their insureds is in alerting them to the vacancy clauses in their contracts, Flannagan said. Work that would require homeowners to leave the premises—even for 30 days—could, in some cases, nullify homeowners’ coverage. She also noted that informing homeowners of what may and may not be covered in cases of damage during renovations is important. For example, if areas of the home are exposed to the weather—i.e. a wall is knocked out or a chimney is removed for a period of days—things such as water damage from rain may not be covered.

Then there are the do-it-yourself projects, which call for very different insurance needs. A full 54 percent of home remodel projects are done in just this way. In many cases, it may be wise to get a personal liability umbrella policy, and agents should alert their insureds to the fact that these are available relatively inexpensively.

“Agents are very proactive with their clients, but they can’t visit everyone’s home,” Flannagan said. “So consumers are going to have to be proactive, as well.”

Estimating a home’s value
One of the easiest ways for them to be proactive, according to Peter Wells, a vice president with Marshall & Swift, is for the agent to provide them with the proper questions. Using total-component systems rather than square-footage systems, he said, is one of the best ways to do that.

According to the National Association of Home Builders, the remodeling market grew to $115 billion annually by 1994. Building trends suggest that the insurable value of a given group of homes would increase by an average of 3 percent per year, simply as a result of the remodeling and addition activities occurring in the homeowners market.

Wells estimates that only 40 percent of agents in the United States currently use total-component systems. That leaves well over half of all agents without a sound basis, Wells said, for updating policies when the insured
remodels.

As Wells explains it, unless an addition is made to the home that results in greater square footage, there’s no good way to increase a home’s coverage using the square-footage system even though the home’s value could have increased by more than 25 percent. “There’s just not enough room to get at changing those variables in the square-footage systems,” he said. “You can’t get to those things easily.” Wells estimates that 5 percent of an agent’s book of business increases every year by at least $10,000. If agents can’t update a policy sufficiently upon a renewal “the good jobs they did when the policy was first written will be for nothing,” he said.

Utilizing a total-component system allows agents to increase values for specialty items such as custom cabinetry, expensive tile work, light fixtures and even total room remodels.

“Total component estimating helps by capturing all the characteristics of a home that affect the value,” Wells said. “It’s a concept that needs to take hold in the industry and become a pervasive practice. It better protects the insured and the company because it provides a truer reflection of the actual replacement value of the home.”

Topics Agencies Homeowners Contractors