Increased Construction Prices and The Impact to Your Homeowner’s Insurance

Construction costs and home values move independently, and a homeowners policy is written against the first of those, not the second. When materials and labor get more expensive, the cost to rebuild rises whether or not the market value of the home does.

What is actually driving reconstruction costs?

Lumber alone has run through sharp swings in recent years, and Bureau of Labor Statistics producer price data tracks those movements for construction inputs. Demand for single family homes, interest rates, tariffs on imported materials, and labor availability all feed into what a rebuild costs on any given day.

The effect is amplified after a widespread event. When many households in one area rebuild at the same time, local demand for materials and trades spikes, which is the demand surge that extended replacement cost coverage exists to absorb.

Skilled trades are the other half of it. Where demand for construction is high, qualified labor is harder to book and costs more, and that shows up in a reconstruction estimate as surely as the price of framing lumber does.

Why does the replacement cost estimate matter so much?

The increased prices of construction materials have also affected the cost of homeowners insurance because of the increased replacement cost of the house. Replacement cost is the cost that would be needed to rebuild your house to its current state. It is regularly confused with market value or with the mortgage balance, and it is neither. On a replacement cost basis, the policy is built to fund rebuilding to the same condition, and the dwelling limit shown on the declarations page caps what it pays. A limit set against an out-of-date estimate leaves the difference with the owner, and on a total loss that difference is not marginal. Many California policies carry an extended replacement cost endorsement, which adds a stated percentage above the dwelling limit to absorb a demand surge. That percentage is a cushion on top of the limit, not a replacement for one. A sustained shift in material or labor prices is the kind of change that needs the dwelling limit itself revisited.

Why does that change what the policy costs?

The dwelling limit is one of the largest inputs into a premium. When materials and labor cost more, the figure needed to rebuild rises, and the limit required to fund that rebuild rises with it. That is the mechanism connecting construction prices to what a homeowners policy costs.

How is the estimate actually put together?

An experienced agent can walk you through a replacement cost estimate that reflects current construction prices. The dwelling limit you settle on remains your decision, and some owners also get a contractor’s opinion of what rebuilding would cost today.

While calculating the replacement cost of your house, your insurance agent will keep the following factors into account:

• Location of your house
• Total square footage of your home
• The type and quality of building material used in construction
• Various features of your home (skylights, vaulted ceilings, crown molding, etc…)

Your insurance agent should have a replacement cost estimate tool with updated costs specific to your location. It is worth reviewing that estimate with your insurance agent and confirming the details they hold for your home are current. If the review shows the limit is behind, the adjustment is yours to authorize.

Keeping your limit ahead of construction costs

Construction prices move, and a dwelling limit set against last year’s figures will not fund this year’s rebuild. An experienced agent can run the estimate and walk you through what it shows. Where the limit lands is your decision, and it is worth revisiting at each renewal rather than once at purchase.

Construction cost moves quietly, and a dwelling limit set three renewals ago is usually the one that falls short. Request a quote and we will check yours against what a rebuild costs now.

Disclaimer

This article is provided by Schneiderman Insurance Agency for general informational purposes only. It is not legal, tax, financial, claims, or coverage advice. We are licensed insurance professionals, not attorneys, accountants, or financial advisors, and nothing here should be relied on as a substitute for advice from a qualified professional in those fields. This content is general in nature and is not a review of, or a recommendation for, any individual reader’s specific insurance needs, policies, or circumstances. Insurance coverage depends entirely on the specific terms, conditions, endorsements, exclusions, limits, underwriting eligibility, carrier, and facts of each situation, and the actual policy language always controls. We do not guarantee any coverage, pricing, eligibility, underwriting approval, or claim outcome. Reading this article does not create an agent-client relationship. To understand how these issues apply to your situation, please review your own policy and speak with a licensed insurance professional, and consult legal, tax, or financial advisors where appropriate.