As the economy continues to recover, a growing number of families are investing in home expansion or remodeling projects. According to recent findings from BuildFax, a leading building permit data source, the frequency of residential renovations has increased steadily of late, once again reaching levels similar to those at the height of the latest real estate boom. Remodeling projects categorized as “substantial” increased by 9.3% in 2012, 10.2% in 2013, and 11.7% in 2014.
Before undertaking such a project, however, it is critical that homeowners fully understand the range of risks involved—from unreliable contractors and worksite injuries to property loss, lawsuits and family safety threats.
Owners of high-value, custom-built homes are at particular risk of finding themselves underinsured during or after a project, leaving themselves and their families vulnerable to potential financial loss and hardship.
Fortunately, there are concrete steps that homeowners can take before, during and after construction to help ensure that they are prepared for all contingencies and sufficiently insulated from risks. For wealth managers, who may learn about renovation plans when clients ask about affordability and financing options, discussing these risks and preventive steps with their high-net-worth clients can be an effective way to strengthen client relationships.
Before Construction: Qualify Your Contractor; Consult Your Insurance Agent
So many potential risks and liabilities emanate from the choice of a general contractor that this decision can be one of the costliest errors a homeowner can make. To choose wisely, homeowners should take the time to thoroughly research contractors using a variety of sources.
- reaching out to trusted advisors within personal or family networks for recommendations
- vetting potential contractors with state licensing agencies and the Better Business Bureau
- asking for credit and past client references
- if practical, inspecting past job sites.
In the final stages, have a professional background screening of the contractor performed. Finally, it should be noted that homeowners should never act as their own general contractors.
Another critical step for homeowners during the planning stages: consult with their insurance agent. The insurance agent can help make sure the contractor and subcontractors have the right types and amounts of insurance.
Many HNW families have homes that would cost more to rebuild after a total loss than the typical amount of insurance carried by contractors. Special provisions may be necessary.
In addition, the insurance agent can make sure the family has the proper insurance in place. Homeowners policies usually include restrictions in coverage that apply during a major renovation project. A builders risk policy or endorsement may be required to fill the gap. Umbrella liability coverage limits should also be reviewed. The agent might also suggest installing water leak detection devices or other safety systems.
In combination, premium credits for these devices can reduce premiums by 30% or more, and installing them while the home is already under construction can be very cost-efficient.
During Construction: Safety First