Most contractors know that if they fail to carry general liability or worker's compensation insurance, they are just one lawsuit or accident away from being broke and out of business. Far fewer seem to realize that it is equally risky to remodel homes that are inadequately insured by the owner. The vast majority of remodeling projects are completed with no loss of property, but when there is a loss, the problems can be huge.

For example, let's say the Smiths own a home that is worth $500,000 and is insured for that amount. They hire a contractor to remodel the home for $250,000. If the project work is nearly complete and a fire destroys most of the home, the Smiths may not have enough money — even with the insurance settlement — to repair the house or redo the...

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