New Challenge to Rising Supply Costs: Replacement Coverage

If disaster destroys a home, the owner’s “replacement coverage” should cover the cost of rebuilding – but maybe not if current building costs have outpaced policy limits.

NEWARK, N.J. – If your home is destroyed by fire or another disaster – natural or man-made – do you have enough insurance to rebuild it?

Maybe not, experts say. Blame the pandemic.

With soaring prices for building materials due to shortages associated with COVID-19, the cost to rebuild has drastically increased, while most homeowner’s insurance policies have remained the same.

Stuck at home during the pandemic, homeowners tried to make the best of the situation. Industry experts said people spruced up their houses, remodeled or built additions for extra living space to accommodate their new life of working and learning remotely.

The projects put a strain on the availability of materials, and prices shot up.

This is a trend seen during the last 12 to 15 months of the pandemic, said Paul Felsen of Felsen Insurance. The delay in getting supplies, combined with a shortage of labor in the construction industry, has caused home rebuilding to become much more expensive.

“We’ve seen some pricing increases anywhere from 3 to 5%, maybe even to 6% with some insurance carriers,” Felsen said.

According to the Bureau of Labor Statistics, lumber, which is beginning to show signs of leveling off, was not the only material that drastically increased in price. It is more difficult and more expensive to buy iron, marble and granite tiles, new flooring, paint and plumbing fixtures.

Just last week, 1,000 board feet of lumber, which traditionally cost under $400, was selling for more than $1,000, reports show. The price has dropped to about $900.

“I’ve never seen rebuilding costs escalate this much,” Felsen said. “If it used to cost $300,000 to rebuild a house, now it might cost $350,000.”

This is the time, he said, to review the insurance policy.

Homeowners should go over their policies and discuss any changes with their insurance agent. When renewing an insurance policy, it is important to reassess each time. “Don’t just take the automatic renewal. Talk to your agent and review your policies,” Felsen said.

Eva Loayza, the public affairs manager with the New Jersey Department of Banking and Insurance, agrees.

“In general, the department encourages homeowners to periodically review their policy and coverage,” she said. “It is recommended that consumers shop around to determine the policy that best meets their needs.”

Homeowner’s insurance policies are purchased to cover destruction or damages, theft of personal items from the home and personal liability if others are harmed, industry experts said. There are three levels of coverage: the actual cash value of the home and property, the cost to replace the home and property, and extended replacement cost and value. The cost is based not only on the home, but on the homeowner and history as well.

Experts recommend getting at least five quotes before buying a policy.

“Throughout the summer and fall, the housing market significantly increased in price,” said Ilene Horowitz, a real estate agent at Coldwell Banker New Jersey. She said the shortage of homes inventory has pushed prices up. “We have a lack of supply, so there’s a shortage of homes for sale, and there’s a strong buyer demand,” Horowitz said. “So sellers are able to test the market and ask for a little bit higher than what the market might indicate.”

The higher home prices and the low inventory have contributed to homeowners’ opting to upgrade their current houses instead of moving.

“I wouldn’t advise anybody to sit out,” said Horowitz, who specializes in Morris County real estate. “Because when you’re buying a home, you’re just not buying a product, you’re buying a lifestyle.”

Homeowner’s insurance, she said, is based on the costs of what it takes to rebuild a house: As materials increase in price, so should insurance coverage.

This can also go the other way, Horowitz said. Keep an eye on trends, and as the inventory of building materials increases, the prices should come down, and so will the cost of rebuilding.

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