From the September 2011 issue of Claims Magazine •Subscribe!

Under Construction or Renovation?

When Coverage Might Not Apply

With the housing market in its current state, there are more foreclosed homes up for grabs than usual. Some individuals are able to take advantage of this situation and purchase a home for much less than what it is worth. While many of these houses are in good condition, some are in need of extensive amounts of repair, which brings us to the topic of this month’s column: What is the difference between construction of a property and renovation of a property, and how is coverage affected?

I have received a number of questions at FC&S lately regarding the difference between construction and renovation. Many people feel that if a house is being extensively renovated, then the policy exception stating that a home being constructed is not vacant would apply, and that a home under renovation would not be considered vacant. For example, a recent subscriber asked about an insured who purchased a foreclosed home and took out a non-owner-occupied policy on the dwelling. The property needed significant framing work, which the insured was completing while the property stood uninhabited. Although the insured was away from the premises, the property was broken into and vandalized. The carrier, however, denied the loss because the property was vacant. The subscriber felt that since the property was “under construction,” then the exception should have applied. But does it?

Stand By Me

The standard ISO homeowners’ policy contains an exclusion for vandalism and malicious mischief to any property that is vacant for 60 days before the loss. The exclusion’s exception states that “a dwelling being constructed is not considered vacant;” the policy, however, does not define construction.

When terms are not defined in a policy, standard court practice is to refer to a common desk reference. Merriam-Webster online defines construct as: “to make or form by combining or arranging parts of elements: build.” To renovate is “to restore to a former better state (as by cleaning, repairing, or rebuilding).” Therefore, a dwelling is under construction if it is being built from scratch. There are no standing elements. A foundation must be laid, framing must be put up, and wiring, plumbing, walls, floors, and ceilings all must be installed.

When a building is being renovated, it is being repaired or rebuilt. Buildings being renovated already exist; only certain parts of the structure are being modified. Even if renovations are extensive, the process is still completely different than starting construction from scratch. The foundation is laid, walls are present, and wiring and plumbing are in place. So, to answer the first subscriber’s question, we explained that his property was under renovation and not under construction, thus the vacancy provision applied.

Another subscriber relayed a similar situation. The insured purchased a property with the intention of flipping it, so the property remained vacant while renovations were being completed. During that time, the heat pump was stolen. Again, the subscriber’s opinion differed from that of the carrier. The subscriber thought that the exception for theft in or to a dwelling under construction would apply. However, the carrier held that the property was not under construction, but that it was being renovated, and the vacancy exclusion applied. We at FC&S sided with the carrier because, as we have already detailed, construction is vastly different from renovation.

A Complicated Framework

But what about renovations where entire rooms are being added? That is considered new construction, and it could be argued that a room being built onto the back of the house is under construction. However, the home must be looked at as a whole. The rest of the house is already standing; it exists. While part of a foundation must be poured and framing, plumbing, and wiring must be added to the extension, the remainder of the house is still livable. Therefore, even though in one sense adding a room is new construction, it really is just the renovation of an existing dwelling.

This especially impacts those with Chinese drywall issues. If they vacate the premises so the drywall can be removed and replaced, then that is considered renovation rather than construction. Now, issues surrounding vacancy versus unoccupancy will rear their ugly heads, but let’s reserve that discussion is for another article.

Part of the renovation-versus-construction problem arises from the use of the terms interchangeably, even though they have different meanings. This is a situation where semantics is critically important. Had the writers of the policy wanted to include an exception for renovation as well as construction, they would have worded the policy that way. However, only an exception for construction exists. It does not help that building materials are often loosely referred to as construction materials, as they are indeed used to construct things. No one talks about renovation materials, thus leading to the idea that if you are using such materials, then the property is under construction, not just being renovated. There is a solid distinction between the two, and that is what determines whether coverage applies.

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