A homeowner should keep insurer informed of remodeling work

Owners who don't make their insurance company aware of past or planned remodeling jobs may find themselves without proper coverage if a claim must be filed later.

Q. We did a fairly small ($6,000) remodeling job on our house in 2007. Now we are planning a bigger job that will involve lots of construction, including the addition of two new bedrooms and bathrooms. Are we required to report this information to our insurance company?

A. You aren't required to report past home-improvement projects that you have already completed - nor must you let the insurer know about plans that you have made for a future remodeling or expansion project - unless the policy specifically demands such notification.

From a financial standpoint, though, there are several reasons why it would be best to contact your insurance company to let it know about the work that you completed in 2007 and the larger job you are planning to begin soon. If you don't, you could find yourself woefully underinsured if the home is damaged by a fire or natural disaster because your current coverage is primarily based on the size and condition of the property before you completed your first remodeling job two years ago.

To illustrate, say you obtained $200,000 in coverage several years ago but the remodeling job you completed in '07 and the work that you're planning now would add another $75,000 to the cost of rebuilding the house if it was destroyed. The insurer would likely be obligated to pay a maximum of $200,000, less any deductible the policy includes: You would then have to pay the rest of the reconstruction costs from your own pocket.

Also realize that there is a chance a contractor or a subcontractor might get hurt while working on the upcoming job. Although the general contractor may promise that all of his subcontractors are insured by his own policy, there's no guarantee that his policy is up to date. If it has lapsed or contains strict exclusions, you could be held liable if someone is injured and files a lawsuit. To protect yourself, you may be able to arrange inexpensive, short-term coverage for all of the workers until the job is complete.

There is another key point to consider. If you plan to use common construction material and other items in your upcoming remodel, the increase in your annual homeowners premium won't be very high. But if the work will involve top-of-the-line products, such as hand-carved molding around the ceilings or expensive lighting and plumbing fixtures, you will need to let your insurer know about these high-end improvements to guarantee that your coverage will be adequate to replace such items with comparable material if disaster strikes. Otherwise, the insurer might pay only for cheaper fixtures to replace those that were destroyed and pay little or nothing for the fancy molding around the ceilings of your new rooms.

Q. Could you please explain the difference between a "half-bath," a "three-quarters bath" and a "full bath?"

A. Sure. A half-bath is a bathroom that has only a toilet and sink. A three-quarters bath has a toilet, sink and shower. A full bath has all three, and also a tub.

Q. We are interested in forming the type of inexpensive living trust that you recently wrote about so that our heirs will not have to go through the long and costly probate process to inherit our home after we die. Are homes and other real estate the only types of property that can be placed into a trust, or can other items (like my great-grandmother's antique chandelier and my husband's coin collection) be put in the trust and thus avoid probate, too?

A. You can put virtually anything you want into a newly formed trust. Most folks automatically put their home in the trust because it's their biggest asset. Because a trust is a private document, the house and any other items in the trust can pass quickly to heirs by legally avoiding probate court.

It's not unusual for the assets of a trust to be completely distributed to heirs within a few months. Conversely, items left to heirs via a will rather than a trust must go through probate, which can easily take a year, or even more than two, to complete - plus cost tens of thousands of dollars in attorney's fees and related court expenses.

• For a copy of the booklet "Straight Talk About Living Trusts," send $4 and a self-addressed, stamped envelope to David Myers/Trust, P.O. Box 2960, Culver City, CA 90231-2960.

© 2009, Cowles Syndicate Inc.