Does It Make Sense to Renovate After a Fire or Flood Damage in Your Home?
By: Alex | Date Posted: May 29, 2023
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When your home is damaged by basement flooding, a fire in the kitchen, or more significant types of losses, it can be tempting to use the opportunity as a chance to do some of those renovations you had been thinking about.
In many cases, smoke damage or mold comes with high health hazards, and you and your family will have to move out of your home while repairs are made anyway. It can make a lot of sense to do those renovations while you are already inconvenienced rather than doing repairs only to tear out new flooring or replace new moldings just a year later.
However, if you are making a home insurance claim, the process may be more complicated than you think. While it may still be possible to renovate as part of repairing your home, the insurance company will not pay for these improvements and may try to make it harder for you to receive the full value of your claim.
To explain why renovating after an insurance claim may not be advisable, we are going to take a closer look at the home insurance process and how it can impact your renovation goals. When you are dealing with large claims, a home insurance claim lawyer can help you through the process and may be able to help you navigate the complexities of getting renovations done after a loss.
Construction Costs and Your Coverage
The first thing you should understand is which part of your insurance policy covers damage to the building itself. This is the Structure part of your coverage, and this is separate from insurance payments that help you replace lost and damaged belongings (Contents) and from payments that help with the cost of living elsewhere during repairs (Additional Living Expenses).
One of the issues that many homeowners run into when they file a home insurance claim is getting a low estimate on the cost of repairs or discovering that their coverage limit is not high enough. The insurance company may underestimate how much it will really cost to complete repairs, and homeowners may disagree with the insurance adjuster over which repairs even need to be made. This can create a significant gap between expectations and the money you receive.
Another issue affecting homeowners is the rapidly rising cost of construction. The cost of raw materials such as lumber has climbed in recent years, along with labor costs due to the limited supply of skilled tradespeople. That can leave homeowners in a risky position if they decide to cash out with a lump sum payment rather than work with the insurance company’s preferred contractor.
How the Insurance Company Chooses the Contractor
On that topic, let’s look at how the insurance company usually prefers to handle claims. It starts with how the insurance company generates an estimate for your claim. Usually, the insurance adjuster will decide on the scope of the work that needs to be done, i.e., a list of all of the repairs that need to be completed.
Next, the insurance company will get quotes from a list of preferred contractors that they usually work with. The insurance company will take the lowest quote and use that as their offer to pay out to the policyholder.
The insurer will often then use the contractor who provided the lowest quote. This can have both pros and cons. The insurer may pay the contractor directly without the policyholder ever seeing the money. If there are cost overruns, the insurance company may simply pay for them, which can protect the policyholder’s finances.
Unfortunately, the preferred contractor’s job will be to restore your home to its previous condition before the loss. That means there is no room for renovations or other changes.
Is Your Mortgage Lender Co-Payable on Insurance?
If you are still paying your mortgage, you may not be the one who sees the money from your Structure coverage at all. Your mortgage lender often requires that cheques from the insurance company be made co-payable on insurance payments made to repair the structure of your home. The mortgage lender needs to make sure that homeowners do not simply cash the check and walk away from their homes, leaving the bank with nothing to recoup their losses. Usually, the mortgage company will disburse funds at regular intervals as repairs are completed.
If your mortgage lender is co-payable on your insurance policy, you may not have a choice in the end about renovating during repairs. The mortgage lender will have the final say on how your home is rebuilt because they have a financial stake in getting your home repaired.
Your best approach in this scenario is likely to postpone your renovation plans. The mortgage lender will want to see your home repaired as quickly as possible, with as few cost overruns as possible. Focus on getting back to life as usual and plan your renovations for further down the road.
Cashing Out: Taking a Lump Sum Payment and Working with Your Own Contractor
Despite most insurance companies’ preference for working with contractors that they already know, you may still be able to negotiate a way to hire your own contractor and renovate after a loss from fire or flooding.
You may be able to negotiate a lump sum insurance payment from the company if you insist on working with your own contractor. That will mean you are free to handle repairs to your home in any way you see fit, even if that includes renovations.
However, there are risks that come with this. If your insurance payment falls short, you will be responsible for paying any additional costs. If you have been planning and saving for a renovation, this may be an acceptable risk for you to take, but it is important that you are aware of it.
A lump sum payment may also wind up being lower than payments made in installments. Often, insurance companies insist on paying lump sum payments according to the Actual Cash Value of the structure rather than the Replacement Cost. The actual cash value payment applies depreciation to the full cost to repair or rebuild the structure. There can be a significant discrepancy between these two amounts, and you need to be prepared to pay the difference.
Renovating after a fire or flood can be complicated, but it is not impossible. You will have to negotiate with your insurance company, and you should be prepared to pay considerably more if you want to handle the reconstruction process without interference.
Thank you for reading!