If you haven’t reviewed your homeowners insurance in a while, now is a good time to do so. Specifically, you need to look at your limits for Coverage A, also called dwelling insurance. Due to a perfect storm of factors, rebuilding costs are spiking. As a result, limits that used to be adequate might not be sufficient anymore.
What’s Included in Coverage A?
A standard homeowners insurance policy provides a lot of protection. The policy can be broken down into different types of coverages, including dwelling coverage, personal belongings coverage, liability insurance and additional living expenses.
Coverage A refers to the dwelling coverage part of a homeowners insurance policy. It covers the physical structure of your house. Homeowners are advised to purchase Coverage A with limits that are high enough to cover the cost to rebuild the house. Because the cost to rebuild can change, it’s important to review your limits periodically.
Home Values Are Up
Home values in the United States have surged. CNBC reports that the median price of an existing home was $350,300 in May 2021. That’s a 23.6% increase from May 2020. You’ve probably seen similar increases in your area.
If you own a home, you may be happy to hear that the value has increased, especially if you’re thinking about selling it. When it comes to insuring your house, however, this increase in value can be an issue.
The Cost of Materials Has Increased
It’s not just existing homes that have increased in value. The cost of building materials has also increased dramatically. Supply chain issues created or made worse by the pandemic have caused prices to rise.
In June 2021, the National Association of Homebuilders reported that building material costs had increased an average of 26.1% over the previous 12 months. Some builders were reporting cost increases of 50% or more.
This should be a major concern for homeowners. If your home needs repairs, the costs may be significantly more than you anticipated.
A Labor Shortage Is Complicating the Situation
The construction industry is also dealing with a shortage of skilled workers. According to the Q2 2021 U.S. Chamber of Commerce Commercial Construction Index, 88% of contractors say they are having moderate to high levels of difficulty finding skilled workers. Because of the worker shortage, 50% of contractors are putting in higher bids and 35% of contractors are turning down work.
If your house needs to be repaired, you’ll need skilled construction workers to do it. The labor shortage means that you might have to pay more for the work.
Prices Can Skyrocket After a Natural Disaster
Wildfires, hurricanes, ice storms, and other natural disasters can impact large areas. When this happens, it’s not just one person who has to rebuild. It’s dozens or possibly even hundreds of thousands of people. This sudden surge in demand can cause building costs to surge even more.
When this happens, some people may complain of price gouging, and that might in fact be an issue. However, even if intentional price gouging isn’t involved, prices may go up as contractors get booked to the max and local supplies sell out.
Your Limits Might Not Be Enough
Let’s say you bought your home five years ago. At the time, the value was $300,000, and you got a homeowners insurance policy with limits that were high enough to cover that. In the five years that have passed, you might not have thought much about your coverage limits – but you should.
Between rising home values and surging construction costs, your limits might not be high enough to cover the cost to rebuild anymore. If building costs go even higher after a natural disaster, the difference between what you have and what you need could become even greater.
The Consequences of Not Having Enough Coverage
So, what happens if you have to file a claim and you find out you don’t have enough coverage?
For example, let’s say you have a Minnesota homeowners insurance policy with a $300,000 limit. Your house is destroyed in a fire and you need to rebuild. That’s when you find out that the cost to rebuild will be $400,000. That’s a $100,000 difference. To rebuild your house, you’re going to need to come up with the funds.
But inadequate limits aren’t just a problem when a total loss is involved. Many homeowners claims are for partial losses, with damage that is significantly below the policy limit. However, because of the coinsurance clause, you might not receive the full amount of the claim if your limits are too low.
The coinsurance clause penalizes homeowners for having inadequate insurance limits. It states that the policyholder must purchase a certain amount of coverage, often 80% of the home’s value or claim payouts on partial losses will be reduced, even if the claim is less than the limit of the policy.
For example, if your home is worth $500,000 and you have an 80% coinsurance requirement, you need to maintain coverage of at least $400,000 ($500,000 X .80). If you only have $300,000 in coverage or 60% of the value, you are not meeting the coinsurance requirement. As a result, your claim payments will be reduced, even if the claim is less than your $400,000 limit.
Actual Cash vs. Replacement Cost
Another issue to consider is whether your policy is for the actual cash value of your house or the replacement cost. Because of depreciation, the actual cash value of your house (what it’s currently worth) might be less than the replacement cost (what it would cost to repair or rebuild your house now).
Some policies provide a guaranteed replacement cost or extended replacement cost. These policies can pay claims that are greater than the coverage limit if the cost of repairs increases. However, you may still need to pay attention to your limits. If you have an extended replacement cost policy, your coverage will be capped at a percentage of your policy limits, often around 125% of your dwelling coverage limit.
Check Your Minnesota Homeowners Insurance Policy Now
This is a good time to check your homeowners insurance policy. Make sure your policy limits have kept up with the recent increase in home values and construction costs – you might find that you need to raise your limits.
Also, find out whether your policy operates on an actual value, replacement cost, guaranteed replacement cost, or extended replacement cost basis, and whether you are happy with your terms.
Contact Great Lakes Insurance for help with understanding your coverage needs.