If you haven’t reviewed your homeowners insurance in a while, now is a good time to do so. Specifically, you should 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. Coverage A limits should be high enough to cover the cost to rebuild the house, which does not include the value of the land your house sits on. Because the cost to rebuild can change, it’s important to review your limits periodically.
The Cost of Materials Has Increased
The cost of building materials has 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, especially if they’ve remodeled or renovated their home. You want to make sure that all costs for renovations and/or updates to your house are reflected in this part of your policy. 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 also impact the cost of building. When this happens, it’s not just one person who must rebuild. It’s dozens, or possibly even hundreds, or 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 and local supplies sell out.
Your Limits Might Not Be Enough
Let’s say you bought your home five years ago. At the time, its cost to rebuild was $300,000, and you got a homeowners insurance policy with limits that were high enough to cover that. Fast forward to today, when construction costs have increased due to distribution challenges, and demand for materials and labor, your limits may no longer be high enough to cover the cost to rebuild today. The Consequences of Not Having Enough Coverage It’s easy to understand that carrying $300,000 on a house that costs $400,000 to rebuild means you are going to be short by $100,000. However, inadequate limits aren’t just a problem when a total loss is involved.
Many homeowners’ claims are for partial losses, such as a kitchen fire, with damage that is significantly below the policy limit. However, policies include a coinsurance clause, designed to limit the amount a policyholder can recover if they do not insure their property for at least 80% of what it cost to rebuild the property at the time of the claim.
For example, if your home cost $500,000 to rebuild today, but you only carry $300,000 from when it was originally insured 10 years ago, you are only insured for 60% of what it really costs to rebuild. As a result, even partial loss claim payments can be reduced to 60%, to align with the percentage of coverage carried by the policyholder, even if the dollar amount of the claim is less than the policy coverage limit. Making sure your property is insured for 100% of what it costs to rebuild, is how you protect yourself from a coinsurance penalty clause.
Actual Cash vs. Replacement Cost
Another issue worth considering is whether your policy is for the actual cash value of your house or the replacement cost. Actual cash value takes into consideration depreciation and things like wear and tear, and it might be less than what it would cost to replace or rebuild your house today.
Quality home insurance policies provide guaranteed replacement cost or extended replacement cost coverage. These policies can pay claims that are greater than the coverage limit. 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 Arizona Homeowners Insurance Policy Now
This is a good time to check your homeowner’s insurance policy. Make sure your policy limits have kept up with the recent increase in construction costs and your home improvement projects – you might find that you need to raise your limits of coverage.
Contact Imes Insurance Associates for help with understanding your coverage needs