Homeowners remodeling risks: What policyholders need to know
- Learn the top risks homeowners need to consider before undergoing a remodeling project
- What is risk transfer and how does a homeowner employ this protection?
- What your contractor’s contract should include to protect you
Each year, we Americans spend close to $400 billion in home improvement projects. And when homeowners call in contractors, they’re opening up new homeowners remodeling risks for themselves that producers need to help them understand.
Major risks that may accompany home renovations
“Some of the largest losses that insurers experience occur to homes under renovation,” says IRMI. Here’s a quick list of some issues that arise during renovation projects, increasing the risk of loss:
- Increased foot traffic from the workers leads to a greater risk of injury on the property.
- Valuable objects inside may be stolen.
- Workers use tools to renovate the house that can cause damage. Some involve flammable material, such as blowtorches, paint thinner, floor sanders, etc.
- Unoccupied homes under renovation are a target for vandalism, unauthorized use and theft of building materials.
- Contractors make mistakes too. If they cause damage to the home, their policy should cover the associated costs.
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How to include risk transfer in remodeling contracts
Risk transfer is the best way to handle these increased homeowners remodeling risks, says IRMI’s Personal Lines Pilot. “With a major remodeling project, the homeowner should try to transfer as much of this newly acquired risk as legally possible to the general contractor (GC) and any subcontractors.”
Your homeowner’s remodeling contract should clearly outline the following, says IRMI:
- Scope of work and total price
- Labor and materials involved
- Legal names of both parties
- GC’s physical address, license and tax ID number
- GC’s certificates of insurance for workers’ comp and general liability (CGL)
- Homeowner should be listed as additional insured under CGL, with a copy to the homeowner
- Warranty information
- Timeframe for project completion, including estimated start and end dates
- Homeowner’s role and responsibilities
- Indemnification clause that benefits the homeowner
Basically speaking, transferring homeowners remodeling risks to contractors is a risk management strategy transacted via the remodeling contract. It places responsibility for risk on designated parties (CGL and/or his subcontractors), consistent with their ability to control and insure against that risk. The liability rests with whichever party has the most control over the sources of potential liability specific to the scope of work defined in the contract.
“It always makes prudent sense to ensure that your contractor’s are licensed, bonded and insured and that the contract should be clear,” explained Mark Corey, Arrowhead’s president of Personal Property. “If a contractor is not insured and if problems arise from faulty workmanship or construction, a claim could be denied on a homeowners policy. The only recourse a policyholder might have is the contract. If it’s clearly worded, then the contractor’s insurance may be more likely to respond.”
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When remodeling is complete: Analyze your homeowners coverage
Another often-overlooked step, Corey said, is for policyholders to inform their insurance company if improvements/renovations increase the value of the home by more than five percent. When a policyholder has “Specified Additional Amt of Insurance Coverage A – Dwelling” coverage, the policy form requires policyholders to inform their insurance company.
It’s important for a policyholder to evaluate the replacement cost value on their home once remodeling has been completed. If significant improvements are made, a policyholder could find themselves underinsured in the event of a claim – if they’re not insured-to-value. They could be subject to a co-insurance penalty if the home is less than 80% insured-to-value or the Specified Additional Amount of Coverage A – Dwelling coverage, if applicable, could be null and void.
“Arrowhead’s team can work with our producers to understand the additional risk to a homeowner who launches a remodeling project, ensuring that they have the coverage and understand the steps they need to take, to prevent any unwanted claims,” Corey said.