How to Properly Insure Home Additions and Remodels

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Investing in your home is great. Keeping it insured is even better.

Summertime is approaching, which means homeowners are adding decks, patios, palapas, and other structures to make their home more festive for get-togethers. But before you start digging up dirt and pouring concrete, you need to do your homework to make sure any additions are properly insured — even minor ones. Here’s a quick overview of what you need to know.

Make sure you’re keeping everything legal

No one wants to get fined after spending thousands on a project, so read up on any applicable permits, fees, and regulations.

You may be surprised to find out that certain projects are illegal in your city or state. For example, I was excited to build a firepit in my backyard this summer, only to find out that firepits are in fact illegal in Denver. Homeowners that build them can face a $1,000 fine or even jail time, so make sure your project is allowed where you live.

If you go the DIY route, you may need to pass an exam with your city if the project involves electrical, plumbing, or mechanical work.

If you decide to hire a contractor to complete the project, get proof they’re licensed, bonded, and insured. You should also request a certificate of insurance from the contractor which names you as an additional insured to their general liability coverage.

Understand attached vs. detached

There’s a big difference between building something connected to your property (attached) and something that’s free-standing (detached).

Attached structures are part of Coverage A in your homeowners policy, which is what your entire dwelling falls under. If something happens to an attached deck, it would be covered under the same rules, deductibles, and limits as other parts of your home. On the other hand, detached structures fall under Coverage B, which is usually a percentage of Coverage A.

Because of this distinction, you may end up getting less coverage than you expect for your fancy detached structure. Know the difference between Coverage A and Coverage B in your policy so that you aren’t surprised later.

Know the 80% rule

A little-known but very important rule: Most insurance carriers will not fully cover damages to your property unless you have coverage equal to at least 80% of your house’s total replacement value.

We break this down a bit with an example. Let’s say you own a home that has a total replacement value of $500,000 and purchase coverage equal to $400,000. If there’s a fire that does $50,000 of damage to your home, the entire loss will be covered. Why? You had 80% of the coverage you needed, so you’re in the clear.

But let’s say you only had $350,000 of coverage in this scenario. What would happen? Since you didn’t have 80% of the coverage required, your carrier could use the following formula to calculate your coverage:

(Insurance carried divided by insurance required) multiplied by the loss

This would come out to $43,740 of coverage, minus your deductible. You would have to foot the bill for the rest of the repairs.

Always know how additions will affect the replacement cost value of your home. If you make any changes to your home that cause your coverage to fall lower than 80% of your home’s replacement value, you might be in serious trouble when you file a claim.

If you have questions, talk to a professional

If there’s one piece of advice you take from this post, it’s this: talk to a professional if you have any doubts or questions about your project and how it relates to your coverage. Everyone’s situation is different, and only a licensed expert will be able to properly advise you how to move forward.

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