Most Homeowners Are Underinsured For Inflation and Building Costs

According to a recent American Property Casualty Insurance Association (APCIA), which surveyed more than 1,000 American homeowners with homeowners insurance policies, most of these homeowners have not taken the necessary steps to ensure that their insurance coverage is keeping up with rising building costs and inflation. This could leave policyholders underinsured in the event of a catastrophe.

According to an online poll by The Harris Poll, only 30% of insured homeowners have updated their insurance coverage or coverage limits to account for growing construction expenses. Less than half (40%) of insured homeowners who had repairs or remodels during the pandemic updated their home insurance to reflect those changes.

During this large inflationary period, homeowners must ensure they have the appropriate types and amounts of coverage; sadly, the poll reveals that many people may not be adequately prepared. According to the poll, around two-thirds of homeowners may lack important supplemental insurance coverages that would better serve them in these difficult market conditions, such as building code/ordinance coverage, extended replacement cost, and annual inflation adjustment.

American insurers paid out for just natural catastrophe claims in 2020 and 2021 were $176 billion, the most ever for a two-year span. Recent supply chain challenges, inflation, and increasing demand for skilled labor and building supplies due to exceptional natural catastrophes in the previous two years have played a key role in driving up the price of rebuilding houses and businesses. The cost of construction materials increased by 44% from December 2019 to December 2021. These trends affect post-disaster recovery efforts across the United States, increasing expenditures and extending the time needed for reconstruction.

To guarantee you have enough coverage to restore or rebuild your house should disaster strike, it is necessary to do an annual review of your insurance policy with your insurer or agent. However, only 30% of insured homeowners have updated their insurance policy last year. Homeowners should immediately update their insurance and protect themselves from any damage because rebuilding costs are rising.

The APCIA poll also yielded the following important results:

There is a huge information gap regarding whether insurance covers the market worth of the house or the cost of reconstructing. Sixty-four percent of homeowners who are insured said they are unsure or think their home coverage limits are determined by the real estate market worth rather than the rebuilding cost of their property. Residential property insurance policies often cover the cost of rebuilding a home, with suggested coverage levels typically based on estimated reconstruction costs for homes with comparable interior and exterior features, sizes, and finishes.

The annual inflation adjustment coverage, which automatically updates your policy each year to account for inflation, is not added by 63% of insured homes, or they are unsure if they have.

Sixty-seven percent of homeowners with insurance claim they haven't added—or are unsure if—extended replacement cost coverage to their policy, which raises the amount of coverage available to rebuild your home if the cost of labor and materials rises after a disaster.

Sixty-nine percent of homeowners with insurance claim they haven't added—or are unsure if they have—ordinance coverage for building code upgrades or new energy, which offers extra protection to cover the higher costs of rebuilding following current building rules.

Only 20% of insured homeowners report having generated or updated a house inventory in the case of a loss within the previous year, and 25% report never doing so.

Homeowners should take this as a wake-up call to call their insurer or agent to discuss their insurance policy and ensure they have the coverage they require because climate change is generating increasingly severe and frequent natural disasters. Too frequently, people exaggerate how well-prepared they are for emergencies and natural catastrophes, leaving gaps in preparedness and insurance coverage.

The APCIA advises homeowners to discuss acquiring the following essential coverage features with their agent or business to avoid being caught off guard during the recovery phase after a natural disaster:

• Without calculating depreciation, replacement cost insurance provides the sum required to restore your home with comparable materials and to replace your possessions.
• Automatic inflation guard - automatically increases your coverage level at each renewal time to help keep up with rising prices; however, it is still crucial to check coverage limits during excessive inflation.
• Coverage for building codes and laws is increased to help clients adhere to any new building regulations or green energy ordinances.
• Increases the coverage available to repair your home when labor and material prices soar following a natural disaster with extended replacement cost coverage.
• If it takes longer than expected to rebuild your house, additional living expense (ALE) coverage with optional higher limits could be able to aid with hotel and food expenses.

To promptly and easily account for all of your possessions and declare a loss to your insurer in the event of a disaster, the APCIA also advises making an inventory of the contents of your home. You can use your smartphone to take pictures and videos when creating a home inventory, a service many insurers provide. Keep your inventory somewhere secure and easily accessible, like the cloud.