Filed Under:Markets, Personal Lines

3 rules for mitigating clients' home renovation risks

From unreliable contractors, to missed deadlines to inadequate insurance, home renovation can be a major financial risk. Here's how to manage it.

Money pit? It doesn't have to be that way.
Money pit? It doesn't have to be that way.

Anyone who has ever been through a major home renovation project knows how much ... fun ... they can be.

The list of potential problems is endless, from unreliable contractors, to missed deadlines to inadequate insurance. For homeowners, the financial risks are very real.

And most of us aren't even close to prepared for them.

That's according to a new report (pdf) from ACE Private Risk Services, which found that owners of high-value homes are at particularly high risk, with far too few reaching out to their insurance agents to properly assess the risks before starting work. That's leaving millions of Americans open to significant financial loss and hardship, ACE said.

“Owners of large, custom-built homes are especially at risk because the cost of rebuilding the home has a better chance of exceeding the amount of insurance carried by the contractor,” said Bob Courtemanche, Division Chairman, ACE Private Risk Services, in a statement announcing the report. “In one case, a contractor was at fault for leaving flammable rags on the job site that spontaneously ignited and caused the home to burn down. The amount of insurance carried by the contractor was only one fifth of the cost of rebuilding the home. That’s why it’s so important to have an agent verify that the contractor has sufficient liability insurance.”

What should homeowners do to mitigate these risks? Here are ACE's top recommendations: 

Before Construction

"The biggest mistake a homeowner can make in undertaking a major renovation or home addition is to select an inferior general contractor. So many risks and liabilities emanate from the general contractor that this decision alone can prove the costliest error. To sufficiently find and vet a contractor, homeowners should refer to a trusted network of family advisors, check with state licensing agencies and the Better Business Bureau, carefully inspect past job histories, and perform professional background screening. Furthermore, a homeowner should never act as the general contractor. By consulting with their insurance agent during the planning stages of the home renovation, families may also find this is the perfect time to install new safety systems in their home to guard against theft and property damage and earn valuable insurance premium discounts."

During Construction

"During the home remodeling, assuring worksite safety for the family, crew and home is the key consideration. In situations where family members continue to live at the residence during construction, the risk of theft and other crimes is present, so families should store their valuables and restrict conversations with the construction team to the general contractor and project superintendent. Ensure that all flammable liquids and rags are stored in approved facilities at a safe distance from the premises, strategically place ABC-rated fire extinguishers throughout the home, activate the sprinkler system at all times and protect the home’s contents from the elements by wrapping the home’s exterior at the end of each day."

After Construction

"After a major renovation is completed, the risk of not having appropriate or enough insurance coverage to address improvements to the home and new contents exists. The homeowner should notify the insurance agent to appropriately adjust the amount of homeowners insurance coverage, which is not as simple as adding the cost of the project to the previous amount of coverage for the home. While mass-market insurance companies may offer little guidance in how much to increase coverage, high net worth market carriers will often send an expert to the newly improved home to produce a customized estimate of what it would now take to rebuild it."

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