Supply chain issues and inflation have all become hot topics over the past 18 months in our world and soon home insurance will be added to the list. Everything seems to be up when it comes to home construction: drywall, lumber, brick/stone, paint, concrete, appliances, roofing material, and labor have all skyrocketed. How does this relate to home insurance and why should it be a concern of yours? When a claim occurs, obviously construction is involved – especially when a major loss or a total loss occurs. Insurance values and repair costs therefore have to be scrutinized to adequately pay claims. If there’s insufficient coverage as far as values are concerned, someone is going to end up an unhappy customer.
The insurance industry problem is this: there are currently millions of homes across the country that are now underinsured on their books – some by as much as 25-35 percent. Depending on your specific policy language, having your home underinsured can be a major problem for both you and the insurance carrier.
Some policies have specific language that a residence must be insured for 100% of the current replacement value at the time the policy was written by the carrier to receive the benefit of having what is called “guaranteed replacement cost”. This means if your house is insured for $1,000,000 and it costs $1,200,000 to replicate it when a total loss occurs then the insurance carrier would be obligated to pay the higher number – so long as your home is insured for the correct percentage as stated on your policy. Note – we are talking replacement cost less the land NOT market value.
Some insurance carriers offer versions of guaranteed replacement cost coverage because of several factors – the age/condition of the home or just due to policy language. There are even some policies out there that are ACV (actual cash value) policies (stay away from ACV policies at all cost if you can). Not all policies are alike. If you fall into these categories and your home is underinsured, then you the consumer could face penalties at the time of a loss by not meeting certain co-insurance thresholds and would incur out of pocket out of pocket costs at the time of a loss in addition to your deductible. This is called a co-insurance penalty and it can be costly – usually calculated by the percentage your home in underinsured .
Through the years, most insurance carriers apply inflation guard protection on home policies each time it renews. Thus, each year a factor gets applied to the replacement cost number to keep up with growing construction costs. These numbers are heavily scrutinized by insurance carriers and lately (pre-COVID) have ranged from around 3 to 5 percent. Get ready – because that number is about to skyrocket. Reports are that many insurance companies plan to increase their inflation protection to a range of 9 to 14 percent in the coming year.
How does this affect you and your policy? Simply put, the replacement cost of your home will increase and therefore your premium is going to increase as carriers must align replacement values with realistic numbers of today’s costs of construction and materials. And if an insurance company decides to raise their rates significantly during this time in addition to raising home replacement values a double whammy is going to occur in a big way.
The bottom line is this – Your home needs to be insured correctly at a value that it will cost to replace it (less the land) in the event of a total loss. You don’t want to be the insured who has a major loss and must come out of pocket several hundred thousand dollars because you wanted to roll the dice and buy cheap, undervalued insurance. Insurance is not a commodity. Remove that mindset.
This situation is where working with an independent agency is paramount. Independent agents can work with you to craft an insurance plan that is sound, practical, and makes sense today and well into the future. Now more than ever you need to look at consolidating your insurance with one carrier to maximize discounts. The redundant TV commercial you see all the time these days tells you to “pay for only what you need”. But what if you don’t know what you exactly need, how much you need, or how to do it? Call our office today or contact us at info@fpa.insure and we can walk you through the process in a consultative manner. That’s what we are here for.
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