In the wake of loss or damage to your property from a disaster like a house fire, you may consider reducing or changing your insurance coverages. It is a move that might seem to make sense and save money. After all: why would you need to insure contents or structures that no longer exist? Repairs can be time-consuming and paying lower premiums until they are complete seems to make good financial sense.
Remember: you always run the risk of becoming underinsured when you ask an insurance company to reduce your coverage. Should a subsequent disaster occur, you may find yourself making another claim and not having sufficient coverage to reimburse the full extent of the new loss, leaving you out-of-pocket and still out of your home.
There are a few ways you can safely update your insurance coverage during the recovery period after a loss.
Reducing Your Content Coverage
After a significant loss, it may be appealing to reduce your content coverage, especially if most of your personal contents were destroyed in the fire or flood. It does not make sense to pay insurance premiums for objects that have been destroyed.
Consider the timeline before you start making changes to your coverages. How long will it take to finish the repairs or rebuild process on the structure of your home? It’s common for a family to put off replacing all of their furniture and large contents until the home is nearly habitable again, since that way they won’t have to worry about storage costs. If the rebuild or repairs are nearly complete, you will be replacing your contents quickly, and you’ll need your full coverage amounts again. Making short term changes won’t save much money in the end, and if you forget to change the amounts back, you risk becoming underinsured to any subsequent losses. If, however, the repairs or rebuild could still take 6 months or more, you may be able to save significantly by updating your home insurance policy.
The first step should be talking to your insurance agent or a representative of your insurance company about the possibility of making changes to your policy. Some Insurance companies will put up resistance to changing policy details during the recovery period of a claim, others will tailor coverage and shed unnecessary payments to fit your new reality.
If the structure of your home has experienced significant damage due to a fire or flood, you may be inclined to reduce your coverage until it’s fully repaired. Keep in mind that structural coverage is meant to be set for at least what it would cost to rebuild the home to it’s as-is specifications if it were completely destroyed.
A partially demolished home would obviously require less money to rebuild back to that “as is” partially demolished state after a subsequent loss than a full home would require to be rebuilt “as is.” However, you will also need to factor in Builder’s Risk insurance to cover the value of building materials and the structure as it is being repaired.
Also, keep in mind that if you reduce your structural coverage, your personal contents coverage will likely decrease proportionally.
Builder’s Risk Insurance
Builder’s Risk insurance, which can also be called “Course of Construction” insurance, is a type of coverage you will need as you are managing the repair process on your home. It insures the construction site and property that is left there.
Depending on your policy, it may cover:
- Just the structure of your home, as it is being reconstructed or repaired; and
- Materials on-site waiting to be installed
You may also be able to extend coverage for specific situations, such as:
- Property coverage (for building materials or fixtures) that is being transported to the building site;
- Scaffolding and temporary structures;
- Costs associated with fire department services; and
- Paying for the expenses of debris removal from the property
When determining how much coverage you need from your Builder’s Risk insurance, start by looking at the construction budget. Your policy should reflect the completed value of the structure (including labour costs and materials). Policies are often written in 3, 6, or 12-month terms. If the construction project remains ongoing beyond the first policy term, you can usually extend coverage, though often only once.
Even before the reconstruction process begins, ask your insurance company and review your policy for liability coverage on the damaged property. Damaged and vacant properties are prone to trespassing and squatting, and someone could be injured on the property. Make sure you are indemnified against these risks.
As with any insurance policy, there may be limitations to the coverage such as uninsured perils. Exclusions often include events like earthquakes, employee theft, and contract penalties. Importantly, Builder’s Risk insurance usually does not include coverage for mistakes made in the construction process, including faulty workmanship, design, or planning, or the use of the wrong materials. If you’re concerned about those issues, consider getting professional liability insurance.
You should also talk to the contractor about Builder’s Risk insurance, as in some cases the contractor will take out the insurance and you won’t have to worry about it.
Insurance on Your Rental During Repairs
Families usually rent a house or apartment while their homes are being repaired. You should think about insurance coverage for your temporary accommodation as well. Another loss could happen at the rental unit, and you’ll need insurance to recover from it. There are two options that may be available to you:
- Renter’s Contents and Liability insurance; or
- Carrying your homeowner policy over to the new rental
You can talk to your insurer about whether your policy covers your temporary residence. If not, look into renter’s contents and liability insurance. Without at least liability insurance, you may wind up having to pay for an injured guest’s damages out of pocket.
You should also have contents insurance for your temporary residence, including furniture, clothes, electronics, and other valuables. Treat your temporary residence the same way you would your home and invest in insurance, or you could face even more significant losses.
One of the things many people worry about when they cancel or reduce their home insurance after a loss is whether they can secure fulsome coverage again once the claim is complete. For the most part, that won’t be an issue. However, if you live in an area that’s prone to natural disasters such as wildfires or floods, you may find that these become uninsurable perils, which are disasters deemed too likely to happen, leaving the insurance company unwilling to take the risk. As natural disasters become more common, insurance companies may be forced to add to their list of uninsurable perils.