Although inflation cooled slightly in April, it remains close to a 40-year-high. According to the Bureau of Labor Statistics, inflation stands at an annualized rate of 8.3%, pushing prices higher for consumers, including the cost of lumber and other building materials which were already affected by supply-chain shortages. This has a direct impact on reconstruction costs in the event of a property loss and, ultimately, on whether a policyholder’s homeowners insurance is enough to respond to today’s rising costs.
Higher Lumber Prices, Rising Fuel Costs
According to Verisk’s latest 360Value® Quarterly Reconstruction Cost Analysis, total reconstruction costs, including materials and retail labor, rose 13.5% from April 2021 to April 2022, nearly doubling the rate of increase from January 2021 to January 2022, when costs rose 7.2%. Lumber, which reached historic highs in 2021 before moderating, is again spiking, with costs rising 28.7% year-over-year in April, nearly triple the rate of increase from three months ago, says Verisk.
Additionally, the Verisk analysis points to fuel prices, which rose 45.9% in March, impacting nearly every industry sector, including construction. Roofing composites, for example, are made from petroleum, resulting in an increase of 16.5% year on year, up from 14.2% in the January period, for roofing. Also, making building materials is an energy-intensive process, with materials transported from one location to another. As a result, according to Verisk, the rise in fuel prices is likely to have an impact on all aspects of reconstruction costs.
Inflation and a labor shortage also mean higher wages. From April 2021 to April 2022, combined hourly retail labor rates increased 10.4%, according to the Verisk analysis, compared to a 5.3% increase from January 2021 to January 2022. Drywall installer/finisher and roofer costs, for example, rose by 12.7% and 12.6%, respectively, as demand for construction laborers continues to outpace supply. Rising transportation costs are also reflected in wages.
What Does This All Mean for Homeowners?
Homeowners may be underinsured in the event of property damage as a result of a covered loss. Many homeowners insurance policies include an inflation guard clause for dwelling coverage, which helps mitigate the risk of underinsurance due to expected inflation increases. When the policy is renewed, the clause will automatically increase the coverage limits to take inflation into account. However, the standard inflation guard clause typically accounts for increases in the costs to rebuild at 2% to 3% each year. Inflation levels today are much higher, which could leave a homeowner underinsured.
There are options for policyholders to get their insurance in line with rising costs. One option for policyholders is to check that their dwelling and personal contents are insured for replacement cost value. Replacement cost coverage pays to repair or replace a home or belongings up to the limits of the coverage, without taking into account depreciation or the loss of value over time. Homeowners can check if the replacement cost value is accurate with an insurer appraisal estimate or an in-person estimate by a contractor or appraiser.
Extended replacement cost coverage is also available should the dwelling coverage limit be insufficient to completely rebuild. This coverage will pay a percentage of the difference between the coverage limit and actual reconstruction costs. Another option is to purchase a guaranteed replacement cost, which covers the entire cost of rebuilding regardless of how much construction costs rise.
It’s prudent for homeowners to review their insurance policy and the options available to make sure they are properly covered.