Learn how home insurance costs are affected by the rising cost of construction and what that means for you
If you've noticed price tags inching upward online, at grocery stores, gas stations - everywhere - you're not alone. Unfortunately, costs are increasing across the board and home insurance costs are no exception.
It is clear that recent price increases are due in large part to supply shortages, but how does that impact the cost of home insurance? Will your home insurance costs go up? How do you know?
To answer these questions, we need to explore the ways in which home insurance costs are evaluated and how certain economic trends can have an impact on that evaluation. Today, we'll discuss this in detail and give you steps you can take to ensure that your home is protected no matter what the economy is doing - read on!
Reasons that home insurance costs can increase
Like many things, the cost of home insurance
is determined by a wide variety of factors. Your rates, or the cost per unit of insurance coverage, can go up, which means you pay more for the same coverage. But rate changes aren't the only way that your premium, or the cost of coverage, can increase.
One common way that your premium can increase even without a rate increase has to do with your coverage limit, specifically your Coverage A Dwelling limit (also referred to as dwelling coverage). This is the total amount an insurance carrier will pay to rebuild your home in the event of a total loss, such as a fire. For example, if your dwelling coverage limit is $200,000 and your home is completely lost in a wildfire
, you would be paid $200,000 to rebuild. Your Coverage A limit is a large part of what determines your premium, so if it increases, so too will the total cost of your home insurance policy. For reference, you can always find your Coverage A limit and premium information on your policy declarations page.
In some cases, raising the Coverage A limit happens when you make an addition or improvement to your house. For example, if you decide to add on a large room, the actual amount of home you need to cover increases, so you'll need more coverage to make sure it can be rebuilt in the event of a loss.
However, sometimes your dwelling coverage needs to be increased for reasons largely outside of your control. For example, if the cost of rebuilding your home increases, your existing coverage may not be enough. In such a case, you would likely need to increase your coverage limit.
Currently, many homeowners and insurance carriers are finding that the cost to replace a home has increased substantially, and subsequently many policyholders find that their existing coverage is no longer sufficient. This is due in large part to increased construction costs driven by supply shortages and supply chain problems caused by the recent COVID-19 pandemic.
The rising cost of construction
If you have made upgrades or repairs to your home, or if you are in the process of building a home, then you have likely experienced an increase in construction costs recently
. These prices do rise and fall naturally as they depend on market fluctuations, but the recent increase is not necessarily due to normal economic trends.
The COVID-19 pandemic has stunted production and supply chains for all sorts of goods, including building materials. Furthermore, millions of homes in Texas were damaged during the 2021 winter storm
, which caused an increased demand for building materials while the supply was already suffering. As demand increases and supply decreases, costs are sure to rise.
So how does that impact homeowners and property insurance costs? Replacement cost, or the cost to rebuild a home of like kind and quality, is based on evaluations, such as the Marshall & Swift/Boechk (MSB) valuation, which is widely used by insurance carriers and construction companies. This largely determines your Coverage A limit, or more specifically, the amount of coverage you need to replace your home in the event of a total loss. Keep in mind that an MSB valuation is still an estimate - the actual cost may differ.
Because the cost of materials and even labor have increased recently, it is likely that many homeowners will find that their existing valuation is no longer accurate. These valuations usually take place upon policy renewal, but it is possible that these costs have increased significantly since your last renewal.
To sum all of that up, the cost of construction has increased substantially, so the cost to rebuild your home in the event of a total loss has also gone up. Your current coverage limit could very well be based on an estimate that is no longer accurate. This means you will likely need to get a new estimate and adjust your coverage limit accordingly.
If you find that you need to increase your coverage limit after receiving an updated valuation, your home insurance costs will likely increase as well. Although no one likes to hear that their insurance costs will go up, it is not without good reason. Dealing with a total loss is devastating - the last thing you want is to find out that the coverage amount you purchased previously is no longer adequate to rebuild your home in the event of a total loss.
Next steps: Reach out to your agent or carrier
If you think that your home insurance coverage limit is no longer sufficient, or just want to make sure, the next step is to reach out to your agent or carrier. They can help you review your current policy and coverages and organize a reevaluation if necessary. When speaking to your agent, consider discussing some of the following topics.
Coverages and deductibles.
Ask about your coverage and coverage options so that you can understand exactly what it is you need to do, if anything. If you do find that your coverage limit needs to increase, be sure to ask the representative about your deductible. Because the deductible for many policies is a percentage of the coverage limit, increasing the limit will increase the deductible. If that increase would be cost-prohibitive, your agent may have other options they can guide you through.
Extended Replacement Cost coverage.
Additionally, you may want to ask your agent about Extended Replacement Cost coverage, which is an optional feature you can add to your home insurance policy. ERC is an additional amount beyond your Coverage A limit that you can draw from to rebuild. It is a percentage based on the underlying Coverage A limit, often somewhere between 10% and 50% depending on the carrier.
ERC is not meant to be a substitute for raising your Coverage A limit in situations where your home's replacement cost valuation has increased. Instead, it is meant to be a buffer or safety net by providing additional funds in certain situations where the cost of reconstruction has increased due to factors outside of your control.
For example, in the event of a widespread natural disaster, such as a large tornado
, many homes in a certain area could be in need of repair or reconstruction. As such, building costs and the local cost of labor could temporarily increase and your existing coverage limit may not be enough to rebuild. In such a scenario, homeowners with ERC would be able to account for those increased costs by drawing from the additional funds ERC provides.
Many insurance carriers offer some version of ERC coverage to their policyholders for an additional premium. Some providers may automatically include this coverage when writing new home insurance policies, and others may only offer it upon request. Make sure to find out how your carrier handles ERC when you speak to your agent.
Changes or additions to your home.
Beyond reevaluating your replacement cost coverage, it is also important to keep your insurance carrier or agent informed when you make any changes or additions to your home. For example, if you add an additional room to your house, convert a garage into a home gym
, or replace your roof, the replacement cost of your home is likely to change.
These are large alterations, but even small changes or renovations can have na impact on your home's valuation and thus, the amount of coverage your need. If you replace the carpet in your home with tile, upgrade your kitchen with granite countertops, or simply add wallpaper instead of paint, you will still want to talk to your agent about these changes just to be sure.
What goes into cost estimates for reconstruction?
With construction costs rising, it's important to make sure that all of the features of your home are correctly accounted for. Your insurance agent should be able to work with you to ensure that everything is correct so that the reconstruction estimate is accurate. The following are some of the features that go into an estimate:
- Building materials (rock, brick, wood, metal, etc.)
- Size/square footage
- Year of construction/the year the house was built
- Number of stories
- Type of roof or roof material
- Number and type of rooms (kitchen, bathrooms, bedrooms, etc.)
Difference between replacement cost and market value
When considering the replacement cost of your home, keep in mind that it does not necessarily have anything to do with the market value of your home. Replacement cost is based on the amount it costs to rebuild your home rather than its value on the housing market.
Replacement cost takes into consideration things like the cost of materials and labor, but the market value can be determined by a number of other factors. For example, your home's market value can include the value of the property it sits on, its proximity to schools, cities, fire departments, stores, and so on. It may even take into consideration things like neighborhood resources and features, such as parks and walkways.
For these reasons, the replacement cost
can be more or less than the market value. If, for example, you have renovated a home in an older neighborhood, the cost to rebuild may be higher than the market value. On the other hand, if you have a small home in a well-developed neighborhood in a prime part of town, the replacement cost could be much lower than the market value.
To learn more about Germania's insurance products, request a free quote online or reach out to a trusted Germania agent today!