As home premiums rise, price fatigue or outright sticker shock are causing homeowners to ask to reduce coverage, especially Coverage A – Dwelling Coverage. This coverage is the part of your policy that covers damages to the physical structure of your home due to a covered peril. It will pay to rebuild your home, making it one of the most important and expensive parts of your policy. This coverage needs to be the replacement cost for YOUR home.
Things to consider on your homeowners policy and its renewal premium:
- Coverage A changes impact your home premiums.In the wake of the pandemic, building costs continue to rise. Prices have risen sharply on construction materials. Plywood and paint prices have surged by more than 80%. The cost of Lumber, shingles, appliances, furniture, and everything else is rising fast, too. Supply chain disruptions and labor shortages have further increased prices. As a result, Replacement Cost calculations and Coverage A amounts are increasing, along with insurance premiums. Otherwise, the cost of rebuilding would exceed the amount covered by the policy.
2) There are differences between Market price, New Build cost, and Reconstruction cost:
- Market price does not correlate to build cost; it's just a measure of how much a buyer is willing to pay. Relocate your customer's home to Manhattan and the market value instantly changes—ditto if it's by the ocean or in a toxic waste dump.
- New Build cost is $100-$200 per square foot for the average home. Developers can get closer to $100 per square foot when building a neighborhood of tract homes because they buy materials in bulk and schedule the project for when the weather, labor, and finances are optimal. A one-off rebuild, however, is much more expensive.
- Reconstruction costs will be ‘one-off’ costs to rebuild the house exactly as it was as of the date of the loss. Construction materials and a crew must be sourced at prevailing market prices. Demolition is time consuming and the crew must work around existing utilities, sidewalks, driveways, trees, and other obstacles, which can prevent access with heavy machinery, adding time and expense. Other complicating factors, like inclement weather, the need for specialized crews, sourcing matching materials, or supply chain interruptions can further drive up costs. In addition, costs vary wildly based upon factors like location, land slope, footprint, construction style, customization, foundation, and quality.
- It is important to have a current Replacement Cost Estimate (RCE). You may be tempted to want an apples-to-apples quote from another insurer using your current Coverage A amount, but that's risky. Sixty-four percent of U.S. homes are underinsured by an average of 27%, according to CoreLogic's Residential Cost Handbook. That means two out of every three homes don't have enough Coverage A to rebuild them, even with the 25% Extended Dwelling Coverage endorsement (EDC).
- Check to make sure you have the Extended Dwelling Coverage endorsement. This upgrade makes it possible for your insurer to pay for rebuilding your home to its former condition even if the cost exceeds your dwelling coverage policy limits. The coverage amount you want needs to be enough to rebuild the house today and for the next 12 months. Through June 2022, year-to-date inflation is 9.1%, which means the Coverage A for homes written in January may already be outdated. That's why fudging the replacement cost estimator and relying upon EDC to cover the gap is risky.
The best way to ensure adequate coverage is to make sure you have a current replacement cost amount for your dwelling coverage and have the EDC endorsement. Your renewal may have a higher than normal percentage increase, but having a current Replacement Cost amount for your Coverage A is your best protection against rising prices. In the current economy, it is understandable that we all are looking for ways to trim our budgets. Having a good understanding for your homeowner rates right now will hopefully prevent the heartbreak of discovering that you’re underinsured after a devastating loss. As your independent insurance agent, we are here if you have questions, need advice, or need to confirm your coverage is adequate.
Associated Insurance Managers is located at 11111 Katy Freeway, Suite 120, in Houston. They are a full-service insurance agency providing personal and commercial insurance, as well as private client services. To learn more about the services offered, email firstname.lastname@example.org, visit their website at https://www.aimins.net, or contact them at (713) 365-8400.