Have you seen the recent headlines about the housing market and building material prices? You likely know that lumber, concrete, metal, and even household appliances are significantly more expensive right now. When building material prices go up, construction costs follow right behind.
But how does this affect you if you already own a home? You need to know that rising construction costs have a direct impact on your homeowners, landlord, or commercial property insurance.
When construction costs increase, the amount of money it takes to rebuild your home after a sudden loss also increases. If you experience a fire, windstorm, or other major event, your current insurance coverage limits might not be enough to put your home back together. Insurance companies base your coverage on what it costs to rebuild today, not what you paid for the house originally.
The Hidden Impact of Rising Construction Costs
You might think that because you are not actively building a new house, contractor quotes and supply shortages do not matter to you. However, they play a huge part in the settlement amount you receive from your insurance company after a partial or total loss.
For example, lumber costs alone jumped by more than 250% in 2021. Therefore, rebuilding the exact same home today is far more expensive than it was just a few short years ago. Many homeowners find themselves severely underinsured because their policy limits have not caught up with today’s construction costs.
This creates a serious risk for your property and your wallet, mostly due to a common and often misunderstood policy feature known as the co-insurance clause.
What You Need to Know About Co-Insurance
Most replacement cost insurance policies require you to insure your home for the correct replacement cost amount. This means you must carry enough coverage to pay for a full, ground-up rebuild.
The co-insurance clause requires you to insure your property for a specific percentage of its total replacement value. Most insurance companies require you to maintain at least 80% coverage. If your property falls below this 80% mark, the insurance company will apply a penalty, and you will not receive the full replacement cost for your claim.
Because construction costs climb year after year, your home’s rebuilding value also climbs. This upward trend can easily push your coverage below the required 80% threshold without you even realizing it.
To avoid this painful penalty, you must review your policy regularly. A professional property value assessment or a reliable replacement cost estimator will help you determine the exact amount of coverage your home needs right now. Update your policy every time you make home upgrades, add square footage, and every time construction costs increase significantly.
Protect Yourself With Extended Replacement Cost Coverage
You need solid risk management strategies to protect your family and your largest financial asset. One of the best ways to shield yourself from unexpected price spikes is to add an Extended Replacement Cost clause to your policy.
This feature guarantees that your insurance company will increase your coverage by a set percentage to handle sudden spikes in construction costs that fall outside of your control. For example, if a severe local disaster creates a sudden, massive shortage of materials, rebuilding prices will skyrocket overnight. The extended replacement cost clause acts as a built-in safety net.
Most insurance companies offer options to increase your base coverage by 25% or 50%. Some companies even offer a 100% extended replacement cost option. Choosing a 100% extension effectively doubles your rebuilding budget in a worst-case scenario, giving you immense peace of mind.
Adding this extra layer of protection usually comes with a very small price tag. Talk to your agent and request a quote for different levels of extended replacement cost coverage so you can choose the right fit for your budget.
Take Action and Review Your Policy Today
If you have not reviewed your homeowners policy in a while, you need to make it a priority this year. A quick conversation with your agent saves you from major frustration and unexpected out-of-pocket expenses during a claim.
Contact us at Ashland Insurance today to review your current policy. We are ready to help you adjust your limits, navigate current construction costs, and make sure your property remains fully protected against the unexpected.