Is Your Homeowners Insurance Policy Adequate?

05/30/23  |  Anthony Marinelli

The red-hot housing market has slowed down a bit due to rising interest rates, the onset of inflation and overall lack of consumer confidence. In our area, historically low inventory has been a great hedge against this slow-down of late. Overall, the last number of years have seen home values go way up. That’s great for homeowners, but what does that mean for home insurance?
Imagine you bought your Fremont home just five years ago for $1,250,000. When you purchased your home, you also purchased a homeowners policy that was based on the cost to rebuild the structure if it was destroyed in a catastrophe like a fire or hurricane. Even if the home is now worth $1,650,000, the cost to replace it in normal times would still be about the same as when you bought it, since it wasn’t that long ago. But are these “normal” times?
The critical factor in determining the amount for which your home should be covered is the cost-per-square-foot to rebuild the structure. Ordinarily, it is the cost of the land that is the primary driver in local real estate markets. Those land values have little to do with your coverage amount because that is based on the cost of construction. Again, in “normal” times, the cost of construction does not fluctuate the way home values do.
However, due to the COVID-19 pandemic, government-mandated shutdowns resulted in factories closing for months, massive layoffs, business closures, and the near halt to shipping of materials for all kinds of products. Now construction activity may be back to pre-pandemic levels, but shortages in skilled labor persist, and material prices are on the rise, causing project delays, and building material supplies struggling to keep up with demand. These conditions have forced construction costs to significantly increase since 2021. Prices for everything from lumber, steel, roofing materials, and so on, have been on the rise. Whether these conditions continue to put upward pressure on the cost of construction beyond the short term remains to be seen. Or if inflation and rising interest rates concerns take their place keeping costs ever rising.
Fortunately, some homeowners policies may include something called inflation guard coverage to account for inflationary pressures on construction costs. This inflation guard coverage automatically increases the amount of insurance on your home by about 2 or 3 percent each year. Still, in the hot housing market we experienced since mid-2021, construction costs may have increased by a bit more than the 2 or 3 percent inflation protection in your policy.
The bottom line is homeowners should keep an eye on their homeowners policy. It may be time to check in with their insurance company to evaluate your home’s value and the cost to repair or replace it, especially if you have renovated or remodeled since the time you purchased your homeowner’s insurance.
If you need a property evaluation for your insurance policy, give Anthony, Chuck or Nicole a call. They would be happy to provide an accurate Broker Price Opinion (BPO) at no cost.