homeowner's insurance policyConsider renovating your homeowner’s insurance policy before picking up a hammer or hiring a contractor.

If a fire gutted your home, how would you feel if your homeowner’s insurance policy paid only three-quarters of the cost of rebuilding it?

Not too happy—and understandably so.

Unfortunately, that’s what can occur if you forget to update your insurance for such big-ticket items as a remodeled kitchen or brand-new master bath.

And you wouldn’t be alone in this oversight. According to Marshall & Swift/Boeckh LLC, a leading provider of building replacement cost data, nearly two out of three American homes are underinsured. In fact, these property owners have only enough coverage for 82 percent of the cost of rebuilding their homes in the event of a terrible fire.

Driving this disconnect is a lack of awareness about the expense of rebuilding. Simply put, rebuilding a home often costs more than its selling price. In the past year, the price of construction materials like copper piping, insulation, and shingles has climbed, while the market value of many homes has dropped or leveled out. If insurance coverage hasn’t been adjusted to reflect this new reality, there can be a significant shortfall in the event of a fire.

Meanwhile, since the burst of the real estate bubble, home improvements have been on the upswing. Many people have opted to stay put, choosing to convert an attic into a bedroom or renovate a basement to fit their changing needs. They also are investing in decks, vinyl siding, new windows, and garage doors. Perhaps because these improvements cost less than say, a new bathroom or kitchen, it’s even easier to overlook their impact on the cost to rebuild.

How to renovate your insurance

So, what’s a homeowner to do?

First, before picking up a hammer or hiring a contractor, consider renovating your insurance.

If your dream project is going to raise the cost to rebuild your home by 5 percent, talk to your agent about updating your coverage. Before the buzz saw’s first whine, it’s important to understand what’s covered by your insurance policy.

Don’t be shy about asking your contractor for proof of adequate liability and workers’ comp coverage. Hiring contractors who aren’t insured for liability or workers’ comp carries risk. Contractors and employees may injure themselves while on the job—and sue you. Verify the insurance coverage of the contractor and the subcontractors and ask to see their policies.

Keep a running list of small and mid-size projects—the new counter tops, special windows and doors, flooring, and so on. Over time, these projects can add up. Each year, when you renew your policy and you’re calculating your home’s replacement cost, these should be counted along with more expensive home renovations.

Some home improvements—upgrading electrical systems, replacing your roof, and installing fire alarm systems, to name a few—may qualify for premium discounts. Don’t forget to let your agent know about them, too.

It’s all about re-evaluating your insurance needs to align with changes in your life, no matter how big or small. Make sure you are having regular conversations with your insurance agent or carrier about your coverage to help ensure it accurately reflects your current situation and that you are in the best possible position for being appropriately covered in the event of loss or damage.

Ed Charlebois is vice president of personal insurance for Travelers.