Should you call your insurance agent before remodeling or finishing a basement? Yes. A remodel raises what your home would cost to rebuild, so your dwelling limit may need to go up, and a finished basement needs water backup coverage that standard policies don't include. Call before work starts so your coverage and the contractor's insurance line up.
The short version: Before the work starts, tell your agent the scope and budget. Raise your dwelling limit as value is added, add or increase water backup for a finished basement, and make sure your contractor is licensed and sends you certificates of insurance. Tell us if you'll move out or store belongings during the work.
Raise your dwelling limit to match the finished house
A $60,000 kitchen or an $80,000 finished basement can add substantially to what it would cost to rebuild your home. If your dwelling limit (Coverage A) doesn't go up, you can end up underinsured, and that affects more than total losses.
ISO's 2011 homeowners form (HO 00 03 05 11, an edition many carriers still build from) pays full replacement cost on a damaged building only if your dwelling limit is at least 80% of the full replacement cost at the time of the loss. Fall below that and partial claims are reduced in proportion. Carriers' forms vary, but most have a similar condition. Some extended replacement cost endorsements also require you to report improvements promptly, or you can lose that extra protection. See is your home insured for enough to rebuild?
Finished basements and water: the gap to close first
Standard homeowners policies exclude water that backs up through sewers or drains or overflows from a sump pump. ISO's form also excludes groundwater that seeps through foundation walls and floors. A finished basement turns a messy cleanup into tens of thousands of dollars of drywall, flooring, furniture and electronics.
- Add water backup coverage. It's an endorsement, not part of the standard policy. In our experience it runs about $80 a year for a $5,000 limit and $300 or more for $50,000.
- Size the limit to the space. For a finished basement with living space, we recommend at least $25,000; a high-end finish can easily call for $100,000 or more.
- Know what it won't cover. Water backup coverage doesn't cover groundwater seeping through the foundation or surface flooding. Grading, gutters, a battery backup sump pump and a sealed foundation still matter.
See does homeowners insurance cover water backup in Michigan for more.
Check your contractor's license and insurance
In Michigan, a contractor doing residential remodeling, alteration or additions generally needs a residential builder or maintenance and alteration contractor license when the job is $600 or more (MCL 339.2403). The license doesn't require insurance, but any contractor working in your home should carry it. Insist on:
- General liability, so damage the contractor causes to your home or injuries to others aren't left to your policy.
- Workers' compensation, for their employees working in your home.
- A certificate of insurance sent directly from their agent before the job starts. See what a certificate of insurance is.
During the project
- Materials. Building materials on or next to your property for the job are generally covered as part of the dwelling. But ISO's 2011 form excludes theft of materials and supplies for a dwelling under construction until it's finished and occupied, so for a major project, ask how your policy handles it.
- If you move out. Tell your agent. ISO's 2011 form says a dwelling "being constructed" isn't vacant, but whether a remodel counts depends on the facts and your carrier's form.
- Stored belongings. ISO's 2011 form limits property in self-storage to 10% of your contents coverage or $1,000, but not while your home is being renovated and can't be lived in. Forms vary, so ask us.
Frequently Asked Questions
Do I need to tell my insurance company about a remodel?
Yes. A remodel raises your home's rebuild cost, and your dwelling limit should rise with it. Under many policies, being below 80% of replacement cost reduces even partial claims, and some extended replacement cost endorsements require you to report improvements.
Does homeowners insurance cover a finished basement?
The finished space is part of your dwelling, but water damage from a sewer or drain backup or a sump pump overflow isn't covered by a standard policy. Add water backup coverage sized to the value of the finished space.
How much water backup coverage do I need for a finished basement?
We recommend at least $25,000 for a finished basement with living space, and $100,000 or more for a high-end finish. In our experience, $50,000 costs about $300 or more a year.
Does a contractor need a license to finish a basement in Michigan?
Generally yes, when the job is $600 or more. Michigan requires a residential builder or maintenance and alteration contractor license for most remodeling work at that size. The license doesn't require insurance, but they should carry it. Insist on certificates of liability and workers' compensation insurance.
Are construction materials covered by homeowners insurance?
Materials for work on your home are generally covered as part of the dwelling, but ISO's 2011 form excludes theft of materials for a dwelling under construction until it's finished and occupied. Ask your agent how your policy treats a large project.
The bottom line
A remodel is a big investment. A short call before it starts makes sure your insurance covers the finished home, not the one you had before.
J. Jacobs & Associates is an independent agency in Lake Orion that has insured Michigan homes for more than forty years. We represent more than twenty carriers, so when your project is done we can update your coverage or compare it with companies that may price your updated home better. Call (248) 693-6455 or start a homeowners quote.