Right..?

You would think that your insurance covers the cost to rebuild your house if a covered hazard destroyed it. But more and more, the most unfortunate among us are discovering that’s not the case. Ask yourself: are you confident you have enough coverage?

Nobody likes rising prices. But with recent spikes in inflation, stagnation of real wages, and a war on the horizon, they’ve never been more volatile. But the one thing that’s definitely not getting any cheaper? Building a house. Currently, it’s never been more expensive to repair or rebuild. The quote you received ten years ago simply doesn’t apply anymore.

There are three significant trends causing reconstruction costs to climb. First and foremost: the cost of material has climbed significantly, which, in turn, inflates the cost of construction labor. These two numbers are strongly correlated, and both rose by more than 16% in FY 2021, alone.

“But what does this have to do with my homeowners’ insurance policy?”

You’ve probably noticed that your premiums climb over time. This can happen for many reasons, like having recently filed a claim, or a change to pricing models in your state. But one of the major factors considered in those premium pricing models is projected reconstruction cost. Or, how much the insurance company loses, on average, when they’re required to rebuild a destroyed home.

When you purchase a policy, you agree to a certain amount of Dwelling Coverage. In general, you want this number to match what it would cost to reconstruct the home. If a tornado destroys your $500,000 home, and you had $500,000 in dwelling coverage, and the rebuild only cost $450,000: you’re good. In this case, insurance pays for everything.

But if materials and labor each increased in price by 16% in one year? Suddenly, the rebuild quote is around $580,000. But that’s not the insurance company’s fault. If you want your home to look the way it did before: you’re paying that extra $80,000 out-of-pocket.

But what lead to the rise in labor and material cost? At the risk of oversimplifying, here’s why the current reconstruction cost for your home may be higher than it was a few years ago:

Changes to the Labor Market:

Construction workers are finally making a better living in 2022. Combined hourly retail labor rates increased 4.1% from July 2020 to July 2021 – greater than the 3.8% increase recorded in the previous fiscal year. It’s not a bad thing that laborers are commanding higher wages. Historically, retail construction is one of the worst-paying industries in the world. They work hard and deserve every penny they make! But it does have a “pass the buck” effect on rebuild costs. The owner isn’t about to pay their workers more. You are.

Changes to the Supply Chain:

The materials used to rebuild homes are also getting more expensive. Lumber, in particular – the raw timber that forms the framework and interiors of most homes – has become almost unaffordable. It’s already heavy, bulky, hard to transport, and difficult to extract from nature. This, coupled with a doubling of tariffs on Canadian lumber and an unusually-strong wildfire season, led to an increase in softwood prices of more than 112%. 

These changes have persisted into 2022, leading experts to believe that the price increase of wood is no longer transitory, but a permanent fixture of the post-pandemic world.

Tariffs & Trade Wars:

A tariff is a fluctuating tax on imports or exports, typically between two countries. In 2018, the United States government began imposing new, higher tariffs on steel, aluminum, and lumber from several countries – China, in particular – to discourage currency flow. And now, a new round of sanctions has been imposed on Russia for instigating the Ukrainian war. Since they’re one of the world’s biggest oil exporters, this threatens to drive energy prices through the roof, further increasing the cost of construction.

Tariffs and sanctions invariably cause price volatility, punishing the nation in question. They often lead to shipping and processing delays at ports and create bureaucratic nightmares for construction companies.

Across the board, the construction process has become more expensive. And every extra penny owed is passed down to you, the consumer. So what do we do? It’s unlikely, to say the least, that reconstruction costs suddenly revert to what they were in the before-time. How would you know if the reconstruction cost for your own property has increased?

The short answer is to review your policies yearly. In the post-pandemic world, you should check in frequently, compare policies, and request new quotes for reconstruction costs.

Is it an unfair burden on the consumer?

You bet.

Does it matter to the insurance companies?

Not in the least.

They’re also occurring earlier and later in the year. In Boulder, CO: an enormous wildfire punctuated the last days of 2021. No fatalities occurred, but hundreds of homes burnt down. The very next morning, 10 inches of snow fell on the scorched community. Images of the smoldering, snow-covered remnants became, for many, an unsettling and tragic reminder of our ongoing climate emergency. To add insult to injury: 84% of wildfires occurring in the United States are directly caused by humans. Every year, the number of wildfires grows, leaving more and more people vulnerable to the financial, physical, and emotional devastation wrought by climate change.

If you’re a homeowner in a high-risk area like Alaska, California, Oregon, Idaho, or Texas: it’s imperative you know how your insurance coverage can protect your life’s work from going up in smoke.

First off: does homeowners insurance even cover wildfire fire damage?

The answer is a resounding YES. Wildfires are, unfortunately, the most common total-loss event in the United States. As a result, smoke and fire damage coverage is almost always included in the basic HO3 policy. It provides coverage for the following, which might come in handy in the event of a wildfire:

• Dwelling Coverage (or, in non-insurance lingo: your house)
• Auxiliary structures within the property line
• Personal property
• Additional living expenses, in the event your home becomes uninhabitable due to fire or smoke, or mandatory evacuation.

But, in the immortal words of Benjamin Franklin: An ounce of prevention is worth a pound of cure. There are essential, additional steps to protect your home from wildfires.

Clean Your Property:

Fire needs fuel, and it can use nearly anything lying around your property. Needless to say: if there’s fire on the way, immediately get stacks of wood, mulch, coal, and especially propane tanks away from the perimeter of your house. Be extra cautious around pine and juniper trees, as their leaves contain highly flammable oils and resins. If you have those trees on your property, stay on top of ’em.

Fire-Proof the Roof:

The roof is both a first line of defense and the weakest link when it comes to wildfires. It’s the most exposed, therefore, most-vulnerable surface. But if the roof catches fire, the entire house burns in a matter of minutes. If you live in one of the areas mentioned earlier: your roof must be crafted out of fire-resistant material like concrete, metal, stone, or ceramics. Not wood. And if you do have wood features on other areas of the house, coat them with a flame retardant finish. But even chemical fireproofing isn’t a surefire solution. Dead leaves, brush, and debris in the roof and gutters are all fuel for fire; and all it takes is a tiny, falling ember to set it off. A clean roof is a fireproof roof.

Seal It Off: 

Embers are those tiny, red-hot pieces of burning wood that glow at the bottom of a dying fire. They look lifeless compared to a flame, but they actually burn hotter. And since they’re so small, they can even travel on the wind. If they enter your home through a hole, vent, or other openings: it’s almost sure to burn the inside. During Wildfire Season, cover outdoor vents with hardware cloth and seal off doorjambs to prevent embers from entering your home. It’s worth looking into fire-resistant windows, too, as even ambient heat from a nearby wildfire can cause non-tempered glass to crack or burst.

As the size and scope of Wildfire Season expand, so does the importance of fire prevention.

If you live in a wildfire-prone area: be prepared. A thorough understanding of your homeowner’s insurance coverage can provide much-needed peace of mind in the face of looming natural disasters.

The HO-1 and HO-2 are cheaper, more limited policies. The major difference is that an HO-3 covers your home against all conceivable perils unless an event is named explicitly as an exclusion. On the flipside, HO-1 and HO-2 only cover “named perils” and will not pay out claims for anything other than what’s on the list. For example, the HO-1 policy has fire insurance, but not falling object insurance like the HO-2. And comparing an HO-2 versus an HO-3, an HO-2 will only cover you if a peril is explicitly named in the policy. In contrast, an HO-3 will protect you from anything the policy didn’t specifically exclude.

But there will always be some level of exclusion, even on the HO-3 policy. Knowing what those categories are – what is and isn’t covered – can save life-changing amounts of money down the road. So let’s review the typical, named exclusions on the HO-3 policy:

Earthquakes? – NOT Covered

In most states, “earth movements” are not covered by standard policies. That includes earthquakes, sinkholes, landslides, erosion, and the like. But earthquake insurance does cover these types of events. For those living in geologically-unstable regions, it can and should be purchased as an endorsement (or additional policy) alongside the original HO-3 for an additional fee.

This is the case for all states, except California – where earthquakes are virtually a fact of life. Everyone has earthquake insurance, insurers are federally-sponsored, and insurers are legally obligated to sell earthquake policies.

Floods? – NOT Covered 

If your pipes burst, if the water heater explodes, if the upstairs unit floods and rips through your ceiling: you’d be covered by most homeowners insurance policies. Water damage resulting from freezing, rupturing, or sudden accidental plumbing overflow is covered under even the most basic HO-1. But other types of water damage are still excluded, namely: flood damage.

The reason is: flood damage is enormously expensive to fix. It impacts all house systems and often affects the most sensitive areas of a dwelling – the foundation and utility rooms. So insurers are loathe to pay out those claims. They’ll look for any possible reason to withhold reimbursement.

But flooding isn’t just an overflowing nearby creek. If you have overflow or backup from a sump pump, damage to the sewer/septic system, or backflow in your drains: a standard HO-3 policy simply will not cover the damage. Like above, you’ll need to purchase a separate endorsement and get flood insurance added to your policy. It is only available through the federally-run National Flood Insurance Program.

Power Failures? – NOT Covered

It feels counterintuitive. If there’s a citywide blackout and you lose power to your fridge, that could be hundreds of dollars down the drain. And it was entirely unavoidable! There’s simply nothing you could’ve done to predict or prevent it.

But unless the source of the power failure was a named peril occurring within the property line, it’s not covered under the HO-3.

So say there’s a bad storm, and you experience a power surge. Several major appliances plugged directly into the socket instead of a surge protector have fried. You cannot submit an insurance claim for this for two reasons: 1.) the source of failure was off-residence, and 2.) the surge damage to your appliances was the result of negligence.

Be aware that this strange, counterintuitive clause appears in many HO-3 policies.

Maintenance Issues? – NOT Covered

This is where things get really tricky.

Taking proper care of your home is an essential part of ownership. Clearly, many catastrophic events aren’t covered under standard policy. And they typically originate from neglect and failure to maintain the property.

Examples are numerous and abundant: termites and other insect damage, bird or rodent damage, septic and sewage, rust, rot, mold, electrical failures, smog, industrial and agricultural damages, general wear and tear – none of it is covered. The rationale is: if it’s the homeowner’s responsibility to detect, repair, and prevent damage to the structure, then any damage resulting from a failure to do so, is also their responsibility.

Personal Property – PARTIALLY Covered

While the home is covered in entirety under an HO-3, personal property is still covered on a named peril basis, which means that your belongings – clothes, furniture, appliances, etc. – are only partially covered. This leads to some perplexing situations. For example, you’d be entirely reimbursed for intact clothing damaged by smoke from a fire, but only partially compensated for destroyed clothing buried in an earthquake.

HO-4 and 6 – respectively, renter’s and condo insurance – are not within the scope of this article. But HO-5 is a modified version of HO-3, in which the open perils coverage on a dwelling itself is extended to personal property within the dwelling, providing the homeowner with extensive, additional protection for both family and belongings.

Other Exclusions

Even the above list doesn’t cover everything. There are a variety of other uncommon perils typically excluded by the HO-3 policy. Including…

• Damage caused by war
• Damage caused by a nuclear hazard
• Expenses incurred as a result of identity theft
• Minimal, sub-limit coverage for high-value items
• Government seizure through eminent domain
• Demolition or rebuilds necessary to match building and zoning ordinances

HO-3 policies are based on policy forms written by the ISO, or Insurance Services Office, which provides data and advisory services to the insurance industry. However, just because a policy was based on the standard version of the ISO HO-3 does not guarantee that it adheres precisely to those standards. No two insurers offer exactly the same coverage in their individual HO-3 policies.

You should always, always, always discuss the full scope of a prospective policy’s coverage with a licensed insurance agent, or personal legal counsel, before purchasing.

Making a few smart decisions during the buying process can help you save hundreds of dollars annually. Below are some tips to use when researching home insurance policies.

1. Know the Facts

Before you buy, take the time to thoroughly assess the condition of the home. It’s also important to consider the various components of the house, such as its electrical and plumbing systems. Certain materials, such as masonry houses, can provide an insurance break for minimizing fire damage. However, they can also be very costly to defend against earthquake damage.

2. Consider the Geography

Regardless of the materials used, the location of your home can affect the insurance coverage you get. In most cases, homeowners in areas prone to natural disasters such as hurricanes and earthquakes will pay more for their insurance than those in areas with less severe weather.

Your insurance rates may also be affected by the type of neighborhood you live in. For instance, a home in a well-populated area may cost less to insure than one in a sparsely populated area.

3. Know How Much Coverage is Needed

According to a study conducted by Marshall & Swift/Boeckh, over 60% of Americans are not fully covered for their homes’ replacement value. This figure, which is the difference between the market value of a home and the cost of rebuilding it, can be very costly to pay.

Since the cost of materials has increased significantly in the past couple of years, it’s more probable that a home’s replacement value will go beyond its market value. Having the proper insurance coverage can help lower your insurance costs in the long run.

4. Protect Your Assets

Aside from keeping your home insured, also consider adding liability coverage. This can help protect against the financial losses that can result from a claim. If a person gets injured while visiting your home, the insurance company for that person could hold you responsible for the medical costs of the injured individual. Your policy can also cover these expenses.

Most insurance experts suggest that homeowners get $300,000 in liability coverage. This level of coverage is usually enough to cover the legal expenses of a person who accidentally gets injured while visiting your property.

5. Determine Your Comfort Level

Your deductible level can also be selected by the insurance company. It can be lower or higher, depending on how much money you need to save. Having a higher deductible can help lower your monthly insurance costs.

6. Get Comfortable With Preventative Maintenance

Having the proper insurance coverage can help prevent major losses from happening. Having a home warranty can also help lower your insurance costs as it provides coverage for certain repairs and maintenance needs. Just be sure not to take out too many claims for small repairs. You may see an increase in your policy when you renew.

7. Safety Measures Save Money

Security measures can help lower your insurance premiums. Aside from buying a home security system, consider also adding other safety features such as deadbolt locks and fire extinguishers.

8. Keep Current Records

Having the proper records can help you get the most out of your insurance claim. Having these records allows the insurance company to analyze the condition of your home and its contents.

Before a disaster strikes, take inventory of all of your possessions. This can help you determine the value of these items and what’s inside them. Having a record can also help the insurance company determine if a claim should be made.

9. Pick a Good Insurance Company

Doing business with a good insurance company is important. Before buying a policy, check the company’s complaints record and rankings on various factors such as customer satisfaction and claim payouts.

10. Consider “Float” Coverage

Although a standard homeowners policy can cover most of your home and belongings, it may not provide comprehensive coverage for expensive items such as jewelry and coin collections.

If the value of your valuables exceeds your policy’s limits, you may want to consider adding a “personal articles floater” to your policy. This type of coverage provides coverage for items that are appraised or currently have a market value of less than their current purchase price.