A survey by the Canadian Mortgage and Housing Corporation (CMHC) found that almost 40% of Canadians had renovated their homes in the previous year. However, 67% of this group did not consult their insurance broker or company prior to doing the upgrades. Is it important to do so?
Robert and Shelly are typical homeowners. They decided to put in a “mortgage helper,” that is a secondary suite that they could rent out. They spent $25,000 dollars building the suite (Robert did some of the work himself). They calculated that the suite would add $30,000 dollars to the value of their home, and the rental payments would cover the renovation in just under 2 years.
Six months into renting the suite disaster struck. The hose connected to the dishwasher in the suite burst while everyone was out of the house. The tenant discovered it when she came home from work and there was 4 inches of water covering the entire basement, including the suite. To repair the damages would cost $30,000 and the lost rent would be another $4,000—at least.
When they called their insurance broker about the damage, there was a long pause at the other end of the line. Robert and Shelly had not informed their insurance broker, or the insurance company, about the renovations. This meant that there was no guarantee that the insurance coverage they had would cover this loss.
Why Inform Your Insurance Broker
Why is it so important to inform your insurance company of your plans to build a rental suite in your home or make any other alterations to the structure or the way your home is used?
Fundamentally, adding a suite to a home is considered by insurance companies as a “material change of risk.” This means that when you buy a homeowner’s policy, and subsequently you do something to your home that represents a significant change to the level of risk that your home is exposed to—you need to inform your insurance company; otherwise your coverage could be void.
In addition, the premium you paid for your homeowner’s policy was based upon its condition at the time you bought the policy, and on the estimated cost to reconstruct it should it be damaged or destroyed. The renovations that you make increase the “replacement cost” value of your home. To protect themselves from having to pay for reconstruction costs that they did not charge adequate premiums for, the insurance company would determine that the Guaranteed Replacement Cost protection would be void. Understandably, this could leave you seriously exposed to financial loss in the event of a claim.
Why Are So Many Homes Underinsured?
Why do so many homeowners not inform their insurance broker about the renovations they are making or have made to their home? The main reason according to the above survey is that they felt the work was minor. Others are completely unaware of the need to do so. Still others fear that the broker or the insurance company will report them if their suite is not “legal,” that is, has not been registered with the city or municipality.
In this latter case, the responsibility to report which homeowners have authorized or unauthorized suites has never been the responsibility of insurance brokers or insurance companies. We do encourage, however, that all homeowners with secondary suites to make sure that your home insurance coverage accommodates secondary suites or any other renovations made to your home.
Feel free to call us should you have any questions. We are here to help.