Restoration contractors often work on a property after damage from a storm, fire, or other natural disaster. On projects like this, property owners typically count on an insurance claim to pay for the work – they may not have cash on hand to pay you out of pocket. Understanding a homeowner’s insurance policy – and what it covers – can be helpful when deciding to take on a project. Knowing what to expect from insurers gives you some leverage as a contractor, and can help you protect your business against financial risk on restoration projects.
Is restoration work covered by the policy?
Reading the homeowner’s insurance policy is the optimal way to understand what damage is covered and what damage may be excluded. Even though it might seem like a heavy read, the policy will give you insight into concepts like covered perils and policy exclusions.
While reading the owner’s insurance policy isn’t absolutely necessary, it can help you understand how the project will be funded. Ultimately, the property owner is responsible for paying you – whether or not they get reimbursed by the insurance company. Understanding the policy coverage can help you set expectations with the homeowner.
Note that a Policy Declarations page offers summary information about coverages at inception and renewal. This snapshot won’t provide you with the information needed to have a deeper understanding of how everything works if a customer suffers property damage and considers filing a claim.
Here are a few things to focus on when you sit down and read the entire policy document from beginning to end. And recommend that the homeowner does the same.
Understanding homeowner insurance policies
There are 8 types of standard homeowner insurance policies, numbered from HO-1 to HO-8. The main difference between them is the causes of damage they cover (called “perils”). But policies can also differ in the way they calculate the value of the damage.
Regardless of the policy, the Insuring Agreement is the section that will outline all the insurance company’s responsibilities after a weather event or other covered peril causes damage to a roof or exterior siding, as examples.
“The insuring agreement is a critical part of a homeowners policy document,” says Anthony Dileo, Agency Owner at Pennsylvania-based Northeast Insurance and Financial Consultants. “It lists all the duties that an insurance company has when a homeowner files a claim. You need to know exactly what to expect from your carrier because if you have storm or fire damage, your mind is going to be occupied with getting your house fixed. And that’s probably not the best time to be figuring out policy details.”
Before preparing an estimate, you’ll first want to know if coverage extends to a home’s damage. Some policies have broader coverage than others, and you can plainly see each named peril in the Insuring Agreement.
A basic, no-frills homeowners policy might not cover roof damage that’s caused by a falling object, for instance. As a restoration contractor, that’s something you’d want to know before committing resources to a job that a homeowner expects an insurance company to pay for.
Covered perils, which include events like fire, hail, windstorm, and smoke, define the major differences between policies. Some policies have broader coverage than others. Every homeowners policy also contains distinct sections that look very similar from state to state.
The Insuring Agreement will give you a detailed list of covered perils. According to Insurance Information Institute, the HO-3 is the most popular form, and typically covers 16 perils:
- Fire or lightning
- Windstorm or hail
- Riot or civil commotion
- Damage caused by aircraft
- Damage caused by vehicles
- Vandalism or malicious mischief
- Volcanic eruption
- Falling object
- Weight of ice, snow or sleet
- Accidental discharge or overflow of water or steam from a home system (A/C, water heater, etc.)
- Sudden, accidental destruction of a home system
- Freezing of a home system
- Power surges
Broad-form policies differ from basic policies. They’ll cover almost any peril you can imagine other than those that are excluded, such as floods or earthquakes. So, if you’re reading a broad-form policy, the causes of damage that insurance doesn’t cover — known as exclusions — should draw your attention.
Exclusions: Perils that aren’t covered
When the cause of home damage is not covered under the policy, it’s named as an exclusion. As with covered perils, the policy lists exclusions in the Insuring Agreement.
You should have a general knowledge of what perils are typically not covered by home insurance. This information is especially helpful for restoration contractors when disasters such as floods occur.
Here are 10 common exclusions from a home insurance policy:
- Ground movement
- Wear and tear
- Nuclear hazards
- Government action
- Dangerous or aggressive dogs
- Wind damage in hurricane-prone states
- Intentional loss or neglect
Homeowners frequently purchase additional policies to cover perils that are excluded in their primary home insurance policy. For example, flood insurance policies are common in low-lying areas that are prone to flooding, like New Orleans.
One common issue that contractors encounter revolves around mold. Mold remediation and damage caused by mold fall under policy coverages in some situations.
If a bathroom sink leaks and the policyholder discovers the problem immediately, mold removal and remediation may be covered. If the issue existed for a number of months and the homeowner failed to act, mold likely won’t be covered by the policy.
Fortunately, your experience allows you to distinguish between the two scenarios and proceed as both common and financial sense dictate.
Replacement cost vs. actual cash value
The policy should also describe how the insurance company reimburses the homeowner for the cost of covered damage. Generally, insurers use one of two methods to put a dollar figure on the damage:
- Replacement cost: The insurer pays the cost of rebuilding or repairing the home, without accounting for depreciation.
- Actual cash value: The insurer takes depreciation of the house into consideration when calculating the cost.
The way the insurer evaluates cost is important for restoration work, because the homeowner is often counting on the insurer to pay for the repairs. In most cases, the actual cash value method will result in a much lower valuation.
For example, if a homeowner paid $20,000 to replace their roof 10 years
Why you shouldn’t read the homeowner’s policy
Now that you know what to look for in a homeowner’s insurance policy, let’s talk about why you shouldn’t read it.
The owner is ultimately responsible for payment
At the end of the day, whether or not the insurance policy covers the restoration work is the homeowner’s concern. The insurance company will either reimburse them for the work, or they won’t – in either case, the owner is still responsible for paying you.
If the homeowner doesn’t pay, you can’t go after the insurance company. But for many types of work, restoration contractors have the right to file a lien on their property if they fail to pay.
You are not a public adjuster
The Unauthorized Practice of Public Adjusting (UPPA) has become a nationwide issue that involves individuals acting as public adjusters without proper licensing. Laws have been enacted in 45 of 50 states to protect policyholders from this practice. So, steer clear of a counseling role. But as a contractor, mind these policy provisions as well as the adjuster’s role in the claims process.
Klark Brown, Co-founder of the Alliance of Independent Restorers, reminds contractors that claims adjusters frequently perform remote visual assessments from which to prepare estimates. This can make claim resolutions challenging. “Parties that may not be anywhere near qualified are asked to perform accurate inspections,” says Klark. “The fact that these people are hired by carriers that can offer work to these parties could be accurately construed as high-risk for bias and profit-driven for the carrier. These practices could lead to improper assessments, scopes of work, and eventually undervaluing the claim amount, which won’t make the insured whole with their repairs.”
While you may be sympathetic to a homeowner who has to pay out of pocket for all or some of the restoration work, you have no control over the insurance process. You can’t legally advise a homeowner about their insurance or a pending claim in any manner.
Know your role
When you enter into a contract with a homeowner for restorative repairs, it’s smart to stay within your role. Any claims negotiations should be left to property owners, or licensed public adjusters or attorneys who can legally act on behalf of your customer. Getting involved in a claim negotiation would drain your resources at best, and get you into serious legal trouble at worst. Your ultimate goal is to do right by the customer and get paid as quickly as possible. Part of a payment delay might be due to the actions of an insurance company or homeowners themselves. If non-payment situations drag on, know that – as long as your work is covered under the statute – you can leverage your lien rights regardless of the state in which you do business.