Personal Finance

The insurance risks of a basement man cave

Remodeling & insurance costs
Remodeling & insurance costs

Adding a man cave in your basement might be one of the more expensive financial liabilities of home ownership.

Understanding why comes down to two figures and the details of your homeowners' insurance policy.

  1. Homeowners spend an average $62,834 on a basement remodel, according to Remodeling Magazine's 2014 Cost vs. Value Report.
  2. Floods are the most damaging natural disaster in the U.S., with Allstate putting the average homeowner's losses around $48,000.

And the kicker: Many of your personal possessions in a basement may not be covered in the event of a flood, even if you have flood insurance.

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Possessions removed from the Rafte family's basement after a June 2013 flood.
Source: Marcia Rafte

Of course, it's not fair to single out the man cave. For Marcia and Jim Rafte in Oneida, N.Y., it was a basement workshop, sewing room, a kitchenette, guest bedroom, half-bath and storage room, all submerged after rains caused a nearby creek to overflow in June, 2013.

"Everything in the basement went, and we were within a couple steps of being wet on the first floor," said Marcia Rafte, 67.

Flood insurance picked up $18,000 (the policy's maximum) in structural damage in the family's basement, as well as the garage and backyard, where floodwater moved a covered deck almost into the in-ground pool. Their homeowners' insurance covered $10,000 in possessions.

"We lost well more than that," said Rafte, whose husband was born in one of the upstairs bedrooms in the 1930s. "Lots of pictures and baby pictures, that was the hardest thing."

Experts say the Rafte family's situation isn't an uncommon one. Every state has experienced flooding or flash floods at some point over the past five years, according to the National Flood Insurance Program. (See chart below for details on claims and losses paid.) That's not just hurricanes, but also rapid snow melt, spring rains and other occurrences that result in more water than the ground can absorb.

About a quarter of those floods happen in areas that are considered low-risk. A 2013 report from the Center for Neighborhood Technology assessing flood claims in Cook County, Ill., found that some of the zip codes with the highest concentrations of flood insurance payouts were those that had no land area in a federally designated floodplain.

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Yet basement remodels continue to rank among the top 10 projects, with 22 percent of contractors saying they completed such a project last year, according to the National Association of Home Builders.

"It hits two of the top three reasons people remodel: better, newer amenities and a need for more space," said Steve Melman, director of economic programs for the NAHB. While some families look to the basement as a kids' playroom or home entertainment space, many others are adding full apartments there for a parent, adult child, or even a renter.

Year Number of Losses Paid Dollar Value

Source: SOURCE: Federal Emergency Management Agency

Falling in the gap

Insurance policies haven't caught up to the basement man-cave trend. "They're very specific about what they cover in your basement," said Loretta Worters, a vice president at the Insurance Information Institute.

Most homeowners' policies specifically exclude water damage from floods and other "surface water" such as tidal overflow, as well as water that backs up through sewers and drains or overflows from a sump pump. Nor does it cover below-ground water that seeps into a basement. Policies also typically exclude mold damage, a common result of water damage.

There are exceptions. Policies do cover water damage resulting from a household appliance or plumbing. So if it's the washing machine that floods the basement, you'd be covered.

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OK, but what if you have flood insurance? According to the NFIP, building property coverage includes electrical and plumbing, furnaces, hot water heaters and other structural items such as drywall, stairways and insulation. Covered possessions in a basement are limited to just a few items: Air conditioners, clothes washers and dryers and food freezers, as well as any food inside them. Some valuable items such as artwork may also be covered, but only up to a maximum $2,500.

The simple reason insurance coverage for basements is limited: It's not meant to be living space; rather, a utility area, said Worters. "You want to make it nice, but it's not supposed to be an extension of your home," she said.

Homeowners miss the coverage gap because they don't know the details of their policy, and don't think to check in with their insurance agent when remodeling.

"We find that what's happened to many policyholders over the last four, five six years is that as insurance rates started going up, they did one of a few things," said Mike Soukup, vice president of sales and marketing for ServiceMaster Restore. "They cut some of the little riders for sewer backup or groundwater intrusion, or they skipped flood insurance because of the cost."

Limiting losses

Before remodeling a basement, make a few phone calls—not just to your insurance agent to ask about coverage gaps, but also the city's public works department. They can tell you about typical storm flows in the area, groundwater and other risk factors, said Soukup.

"They'll be able to tell you, hey, you're actually at the bottom of a little bit of a hill here," he said. In risky areas, adding an attic bedroom (which costs an average $49,438, according to Remodeling Magazine) or a family room addition ($80,765) might be the less-risky (or at least, more covered) project for a comparable sum. (See the video above for tips on what to ask your insurance agent.)

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It's also important to inspect the basement. "Look for the telltale signs of previous flooding and water damage," said Paul Sullivan, chairman of the NAHB Remodelers. Those include water marks on the wall, mold or mildew (or a musty smell indicating its presence), and collections of dirt in low areas of the floor that indicate water pooled there. Such signs may rule out a remodel for the risk-averse, he said, and at the very least indicate a need for more precautions that add to the cost of the project:

  • Landscape. Creating a slight slope can direct rainwater away from your foundation. Plant shrubs and other plants no closer than a foot away from your home's exterior, and use an elongated drain pipe to discharge water from the gutters at least five feet away from the foundation.
  • Foundation sealants. Coatings on the inside or outside of a foundation can waterproof it against minor leaks, said Soukup.
  • Water mitigation systems. Depending on the home's location, you might need a sump pump, or a more complex system of pumps, French drains and dams. Costs can range from a few thousand dollars, to upwards of $25,000, Sullivan said.

Such systems can thwart smaller problems, but may still be overwhelmed in the case of a major flood. "Water can be redirected, but not stopped," said Sullivan.

Consumers who have had basement water problems in the past should also keep that in mind when deciding how to furnish the space, said Soukup. "Don't put the $14-per-square-yard carpeting down there, as nice as it might be," he said. Elevate expensive items off the ground, and store personal items in plastic, water-tight tubs.

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That's what the Rafte family is starting to do now, almost a year after the flood. "We have all that space down there; it seems a shame to waste it," said Rafte. Little more than replaced Christmas decorations are down there now, along with an older stove and sink in the kitchenette, and a sleeper sofa purchased at an estate sale.

"I was thinking about the cement floor and was looking for the least expensive carpeting I could find," she said. Then, two days before it was supposed to go down, she discovered groundwater had made its way into the basement. That plan got scrapped.

"You're always thinking about how you can improve your home," said Rafte. "When there's an event like this, you're not so sure it's worth it."