Few undertakings are as financially and emotionally stressful as a home renovation. From major makeovers like adding a new wing to less ambitious kitchen revamps, a potential hornet’s nest of liabilities can sting at any time.
The risks begin with hiring the general contractor, increase in volume and complexity during the construction phase, and live on well after the project is completed, as it takes time for faulty craftsmanship to appear.
For the high-net-worth homeowner, there may be an even higher price to pay when the risks are not managed well. In the absence of enhanced security during the course of construction, their homes and the expensive materials stored onsite may become attractive targets for thieves. In the event of a loss during the renovation, they may be underinsured by hundreds of thousands, if not millions. And if the contractor lacks adequate insurance, it could result in expensive and protracted litigation.
The important thing to consider: With more money spent on renovations, high-net-worth families have more to lose.
Selecting the Right Contractor
Having endured my own kitchen and bathroom renovations through the years, I’m personally acquainted with the stress levels these projects induce. I recently shared my experiences with Eric Bossuk, an agent who specializes in the insurance and risk management needs of a high-net-worth clientele. Eric has plenty of stories of what can go wrong when scant attention is given to the projects’ risks. Rarely do so many different and complex property and liability financial exposures arise from a single enterprise.
“It’s really quite alarming,” said Eric, who is CEO of B&B Premier Insurance Solutions, Inc., in Agoura Hills, California. “Not only are the risks thorny, there’s also the possibility of having inferior limits of insurance protection or no protection at all because the homeowner failed to comply with policy requirements.”
Before we tackle the latter scenario, let’s first address the most important decision a wealthy homeowner must make before commencing a major renovation—choosing the right contractor. Not only will this person be in charge of the project and contracted to abide by certain project rules, a timetable and an overall budget, but he or she must also assemble the various subcontractors that come together to complete the job.
Most general contractors are reputable businesses that are fully credentialed, and have their previous work histories listed with the Better Business Bureau and similar organizations. The question is: How reputable are the subcontractors chosen to perform specific tasks like plumbing, roofing and the electrical system?
If even one contractor is a bad apple, the risks to personal safety and the security of possessions loom large. Eric provided a sensible resolution —require the general contractor to verify and validate the subcontractors’ licensure and experience, as well as document their background screening. Not all contractors specialize in all types of home renovations, especially homes that are older or historic. “You need to have a contractor and subs that are experienced in working on these kinds of homes,” Eric said. “The subs must be experts in particular craftsmanship, such as woodwork or stained glass. They need to understand subtleties like the right type of plaster and mortar composed partly of lime, as these were the construction methods decades ago.”
When recruiting a general contractor, insist on viewing the firm’s completed projects. Visit these homes and question the homeowners as to whether there were any problems money- or time-wise, if the worksite was safe and whether the workmen were courteous and polite. If a concern is noted, discuss it with the general contractor.
Unique Insurance Considerations
Before a project commences, bring in an insurance agent like Eric to review a contractor’s general liability and workers compensation insurance policies, as well as to address the adequacy of coverage should a third party or worker be injured as a result of the construction. If the contractor does not have adequate insurance coverage, high net-worth homeowners are likely to be held financially liable for contractor-related losses.
Agents also will review the homeowner’s own insurance policies. This is critically important. Say the homeowner is planning a $400,000 upgrade to the house. If this eventual increase in the home’s replacement cost is not communicated to the agent and the insurance carrier, and reflected in the homeowners insurance policy, the homeowner risks being underinsured. If the house catches on fire and is destroyed days before or after the project concludes, the coverage could be approximately $400,000 less than the replacement cost of the home.
In other words, discuss these home improvements and their respective value with an agent before having a contractor drive in the first nail. “My goal as an agent is to have a fairly detailed conversation with the homeowner and the insurance carrier to gradually step up the insurance coverage as these major improvements to the home occur.”
Eric also would suggest a builders’ risk endorsement to cover the homeowner’s insurable interest in the unfinished portion of the structure, as well as to cover the materials and fixtures being used on the project.
When a home is under renovation, the potential for loss is significant. Managing many of the risks requires common sense – which often is easier said than done. For example, say a worker tossed a rag soaked with a flammable solvent into a trashcan. There’s a good chance that the rag will spontaneously combust, engulfing the entire home in flames within minutes. This nightmare simply could be avoided if a fireproof storage container was placed onsite.
The use of blowtorches is another fire hazard to consider. “Clients have experienced losses where a plumber is sweating a pipe and the hot solder falls into the wall cavity, causing fire, or the roofing contractor welding the copper gutters inadvertently ignites the groundcover in the garden,” Eric said. “It goes without saying that multiple fire extinguishers must be clearly visible in designated areas at all times.”
Yet another fire hazard involves older, historic homes with then-traditional knob and tube wiring. These older electrical systems may not be able to bear the high amperage electricity consumed by modern building tools. In such cases, the general contractor should advise to upgrade the electrical panels or add a sub-panel.
In many building projects, it is common for construction materials and equipment to be left onsite, typically outside the home. To avoid potential injury and theft, they should be stored in designated areas, and perimeter fencing, as well as a security alarm system, video surveillance and motion-activated lighting, should be installed. If the home is vacant during the renovation, a security guard may be needed, especially at night.
In situations involving multi-million dollar homes and million dollar renovations, the homeowners insurance policy may require that the above steps are taken and paid for by the policyholder. If not, and there is a loss, the insurance may not cover the claim in full.
The bottom line for high-net-worth families and individuals mulling a major upgrade to Home Sweet Home is to anticipate these many threats before hiring the general contractor. And the best way to anticipate them is in discussions with a knowledgeable insurance agent.