Why It's Time to Update Your Home Insurance

Thanks to a volatile real estate market, your house is likely now worth more than ever, but is your home's insurance keeping up with its value? For homeowners, it's also a great time to renovate or add on, since chances are good the market will support that investment, but the very process of renovating invokes risks that may not be covered by your home insurance. Here's why and how to update your home insurance coverage now, so you know you're covered if things go awry.

Annual Review

Consumer advocates and insurance companies agree on this: It's important to start your annual home insurance review from scratch. Though tempting to just update your existing policy, risk factors are changing faster than ever.

Yes, your house is worth more, but don't confuse its current market value with its replacement value, which is what insurance covers. In other words: Don't rely on the latest Zillow estimate of your house's market value to dictate the amount of coverage you need. Also, you can't just add the cost of a renovation to the prior value of your house and figure that's the amount you should insure for.

Here's why: Insurance covers the cost of replacing or repairing your house on the same spot, not the cost of buying a new house on a different plot. If your house burned down, the land would still be there, so that's why market values are less relevant than you might think. The key factor is determining how much it would cost to replace or rebuild your house right where it is based on current local construction costs. The National Association of Homebuilders tracks such costs and is a good place to start your research.

As you evaluate your situation, consider improvements and additions you recently made to the home, says Angi Orbann, vice president of personal insurance property at Travelers. "If you have made significant improvements, such as finishing a basement or expanding the footprint…these types of changes may require an increase to your coverage limits," she says. "Make sure to think about other structures on your property—if you added a shed, pool, or detached garage." And don't forget to include the cost of new furniture, rugs, or art in your refreshed or expanded space.

Renovation Updates

First, discuss insurance coverage with your contractor, because how they manage the project directly affects what you have to lose in the process. Your contractor may want to buy materials when they're available, and then expect you to make or rent space to store cabinets, appliances, wood, or sheetrock. Materials in your garage may be stolen or, if stored in your basement, affected by mold or water damage. Before remodeling, ask your insurance agent about a temporary addition to your policy that covers theft or loss of building materials.

Ask your contractor about their coverage for fire, chemical, and water damage—especially if the project calls for high-risk processes such as stripping paint with a heat gun—and then ask your insurance agent if those processes require a temporary boost in coverage.

Further, confirm that your existing policy covers injuries to workers or visitors, for instance: What happens if a delivery person steps on a nail on your sidewalk? Finally, when the project is done, review how to update your policy to protect your now-more-valuable house.

Asking Questions and Keeping Records

Now that you have a good idea of how much your policy should cover, review your policy directly with the insurance company, not with the agent, advises Amy Bach, an attorney who started United Policyholders, a nonprofit consumer advocacy. "Don't rely on the company's definition of 'full coverage,'" she urges. Find out exactly what's covered and the company's current norm for homeowner insurance deductibles.

Many insurers have been raising deductibles and often coach customers to choose a deductible that is "affordable," Bach continued. "Make sure the deductible is truly affordable, such as $5,000—not 20 percent of the value of the house."

She also stresses documenting every aspect of your communications with your insurer. At the very least, you can use this evidence to work with your insurance agent to find a policy that best suits your needs. At worst, use your documentation to push back if you make a claim only to find that the policy covers less than you thought it did. "He with the best documentation wins," says Bach.

Emergency Coverage

Finally, update your understanding of risks that might damage or destroy your house. Nightmare events—like runaway wildfires, floods, and tornados—can wipe out your house and everything in it. Climate change is driving ever-changing guidelines for risk management, which means you need the latest information on risks facing your house and how to craft the best coverage.

Flood coverage is shifting rapidly, says Mike Barry, chief communications officer for the Insurance Information Institute, so don't solely rely on your mortgage lender to determine if you need flood insurance. Water damage is far from limited to floodplains: Drain and sewer backups, roof leaks, and plumbing breaks can also inflict water damage, he continues, and 90 percent of weather disasters involve some aspect of flooding.

For a quick overview of climate, flood, and wind risks to your house, visit FreeHomeRisk for a risk calculator offered by the Insurance Information Institute. After entering your zip code, it provides a custom report showing the types of disasters most likely to affect your address, from drought to flood to earthquakes caused by fracking.