Doing Home Renos? Check Your Insurance

The new federal home renovation tax credit has highlighted what the insurance industry considers to be a chronic problem of homeowners not having enough coverage.  The temporary new tax measure, announced in the January budget, provides a credit of up to $1,350 for renovations or fix up jobs costing between $1,000 and $10,000. A general rule if you're undertaking a reno that adds substantial value to your home: Call your insurer.  It's quite possible your chat will result in you paying a little more in home insurance premiums, which I can tell you from personal experience have risen sharply in recent years. But from the point of view of minimizing hassles if you ever have to make a claim, the extra cost will be worth it.

"Your home is the largest single investment you'll make, and it's worth it to protect it," said Anne Marie Thomas, an account manager with InsuranceHotline.com and a former underwriter and broker.

The home reno tax credit was announced as part of a package of measures to stimulate the economy, and it seems to be working. ResMor Trust Co., a small player specializing in mortgages, commissioned an online survey of 1,000 Canadians recently and found that 70 percent planned to renovate their home before the Feb. 1 deadline for using the home reno tax credit. Almost 40 percent said the decision to renovate or the amount to be spent was influenced by the tax credit.

But even if you're not renovating, it still might be worth a call to your home insurer. When you set up a home insurance policy, you have to answer a number of questions designed to help the insurer decide how much the replacement value of your home would be. Note: This pertains to the cost of rebuilding, refurnishing and restocking your house, not its value in the real estate marketplace.  Let's say the replacement value of your home is set at $200,000, and then you spend $25,000 to finish your basement. If you don't notify your insurer and your house burns down, your coverage could fall short of what's ultimately required, leaving you out of pocket for some of the replacement costs.

"There's a lot of talk in the industry about people being under-insured," said Chris Cooney, vice-president of pricing for the home and auto division of RBC Insurance. "That's the situation where someone needs $400,000 of coverage and only has $200,000 or $300,000 of coverage."

Leonard Sharman, a media spokesman at Co-operators Group in Guelph, Ont., cited a recent article in Canadian Underwriter magazine that said 80 percent of residential homes in Canada are undervalued by 27 percent.  "Homeowners must inform their insurance company of any changes to the home that would increase its value significantly," Mr. Sharman wrote in an e-mail. "This is a requirement in the insurance contract. If such an improvement is not reported to the insurer, it could lead to the client being - in insurance-speak - under-insured."

Ms. Thomas, of the online insurance quote service InsuranceHotline.com, said it's worth calling your insurer if your renovation value is going to be more than $5,000. She offered a very rough estimate that a $50,000 reno might cost you an extra $50 a year in premiums.

RBC's guidance is that work such as reshingling a roof qualifies as maintenance and thus shouldn't affect the replacement value of your home. Remodelling of kitchens or bathrooms and installing hardwood floors would similarly be considered maintenance rather than improvements.  Premium upgrades, however, may require that you call your insurer. Ms. Thomas said an example would be an expensive granite kitchen countertop, which could cost something close to $10,000.  RBC's examples of jobs that would qualify as improvements include putting an addition on or building a home theatre in the basement. If you're filling your home theatre with expensive electronics, make sure you have sufficient insurance coverage for your home's contents (as distinct from the structure).

If your house is going to be vacant for more than 30 days during a renovation, then you've got another reason to call your insurer. Unless you get what's called a vacancy permit, you may find your coverage applies only minimally or not at all while you're away.  Ms. Thomas said it's important to consider your contractor's insurance as well as your own when undertaking a renovation. Ask to see the contractor's comprehensive general liability policy, which should protect against damage to your home or a neighbour's.    Your contractor's coverage is especially important because some home insurance policies won't cover damage caused by renovation, construction or repair. RBC suggests contractors should have a minimum of $1 million in coverage.