How Rising Construction Costs Can Affect Your Homeowners Insurance

June 6, 2021 · Personal Lines

Blog How Rising Construction Costs Can Affect Your Homeowners Insurance

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Construction costs are on the rise due to soaring lumber prices and the cost of other raw materials.

  • Between 2010 and 2020, the median sale price of a new home increased $106,100.1
  • Lumber prices have increased 340% from a year ago and are up 67% this year (from January 1 to April 30, 2021).2
  • The increase in lumber prices over the past year has added $35,872 to the price of an average new single-family home and $12,966 to the market value of an average new multifamily home, according to the NAHB.2

If you already own a home, you may not think these cost increases will affect you. However, they have a direct impact on the amount of insurance you should have on your home.

What is a Coinsurance Penalty?

If your home were to be destroyed by fire or another covered loss, you need to have the right amount of insurance to cover the cost to rebuild your home (the "replacement cost"). This amount is different than market value (the amount you could sell your home for). Homeowners policies have a coinsurance clause that requires a home to be covered at a certain percentage of the home's value — typically at least 80 percent. If rising construction costs have caused you to no longer meet the coinsurance requirement, you could face a coinsurance penalty. While you will still be covered in the event of a loss, you may not get the full replacement cost of your home. Learn the factors that affect replacement cost and how you can avoid a coinsurance penalty:

Changes to Replacement Cost

When construction costs increase, due to changes in the market and the effects of inflation, this increases the replacement cost of your home. The replacement cost may also increase if you make improvements to your home, such as:

  • Upgrading windows, electrical, and/or plumbing
  • Remodeling the kitchen and/or bathrooms
  • Finishing your basement or converting an attic into livable space
  • Building an addition on your home
  • Adding a deck, patio, or porch
  • Upgrading the exterior of your home

If your home's value increases, you could fall short in meeting the co-insurance clause requirements in your policy. On the flip side, if your home depreciates in value, you may be paying for more insurance than you need. It is important to assess the replacement cost of your home on a regular basis to ensure you have the right amount of coverage.

Estimating Replacement Cost

Your insurance agent can help you calculate the replacement cost of your home with an online tool called a replacement cost estimator. The estimation is based on a variety of factors, including your home's age, location, size, building materials, and craftmanship upgrades as well as the cost of local labor. Another option is to hire an independent appraiser. This is known to be the most accurate way to find the replacement cost of your home. An appraiser will do an in-person inspection of your home. They will also be up to date on building codes in your area, and they can give you an estimate that includes the cost to rebuild up to code.

Avoiding a Coinsurance Penalty

Here's how you can make sure you have the right amount of coverage and avoid a coinsurance penalty.

  • Know what your coinsurance clause is. This information is usually located in the conditions section of your policy. Not sure how to understand the policy requirements? Reach out to your insurance advisor for assistance.
  • Know the current replacement cost of your home. You should insure your home for replacement cost (the amount it would cost to rebuild your home). Because construction costs can change rapidly, it is important to assess the replacement cost on a regular basis to ensure you have the right amount of insurance. We recommend evaluating the replacement cost every one to two years.
  • Purchase the right amount of insurance. Meet with your insurance agent to discuss your homeowners policy and keep them up to date on improvements you make to your home. They can help ensure you have the right amount of coverage.

Keeping your insurance in line with your current needs is an important part of owning a home. Reach out to your Griffin Owens insurance advisor today to schedule an insurance review.