Recent findings from the National Association of Home Builders (NAHB) confirmed that household construction costs have surged. This rise in construction costs is directly tied to soaring building material expenses. According to the NAHB, current lumber costs are up 340% from 2020. 

There are several reasons for these higher expenses. Specifically, both the COVID-19 pandemic and the presence of historically low interest rates have contributed to a rise in home purchases and renovation projects.  Nevertheless, this increase in demand has been met with supply shortages throughout the construction industry.  During greater demand and lower supply, building material prices have subsequently soared.

This surge in costs could pose coverage consequences for homeowners across the country. As a result, homeowners could discover that their existing policy limits and coverages no longer offer adequate protection—leaving them financially vulnerable in the event of a loss. 

Homeowners insurance carriers may increase policyholders’ premium costs to account for the risk of elevated claim expenses.

Considering these ongoing cost concerns, it’s important for our homeowners to consider taking the following measures:

Review your policy.

Be sure that you fully understand your homeowner’s insurance policy. Take note of whether you have replacement cost coverage or actual cash value coverage. Ensure your policy provides a correct replacement cost or overall value for your home.

Communicate with US!

 Call your account manager for help to determine whether your policy needs an adjustment to insure sufficient coverage in the event of a loss.  Let us know if you conduct renovations or other improvements to your home, i.e., adding a new deck and garage or remodeling your bathroom or kitchen.  This may entail increasing your current limits or obtaining specialized coverage with an endorsement.

Guaranteed or Extended Replacement Cost.

A guaranteed replacement cost policy pays whatever it costs to rebuild your home as it was even if it exceeds the policy limit. This gives you protection against sudden increases in construction costs due to a shortage of building materials after a widespread disaster or other unexpected situation.

Functional Replacement Cost (FRC).

For older structures with ornate or obsolete features, replacement cost coverage to replace these with like, kind, and quality can be exorbitantly expensive. To make coverage affordable, functional replacement cost coverage was created, allowing for replacement of expensive and obsolete items with less expensive and more modern options. FRC is the cost of acquiring another item of property that will perform the same function with equal efficiency, even if it is not identical to the property being replaced. FRC valuation provides a lower valuation than replacement cost, resulting in a reduction of the amount of insurance coverage required and, thus, lower premiums. Most FRC loss settlement provisions provide that losses will be settled following one of these two methods: replacement with a less costly, but functionally equivalent building; or, in the case of a partial loss, restoration of the damaged portion in the same architectural style, but with less costly material (i.e., replacing a mahogany banister with a pine banister).