Home Insurance Renovations | Money


High purchase prices are a hallmark of today’s real estate market. But that’s not why you may have to spend more on your home insurance than before the pandemic.

According to Richard Lavey, president of Hanover Agency Markets at Hanover Insurance Group, based in Worcester, Mass.

“If the market value increases by 40%, that doesn’t mean your insurance coverage needs increase by 40%. It could just be the value of the land, or the demand, or the lack of supply in a particular zip code ”that is causing the increase, he says.

What matters to your insurance, Lavey explains, is whether the cost of replacing the home has gone up more than usual. This is because your coverage amount is calculated based on what it would cost to rebuild your home – using the same or similar materials and workmanship – if you were to suffer a total loss such as a fire.

Two factors caused these costs to rise sharply during the pandemic: higher construction costs and an explosion in home renovations and expansions.

Here’s how each may have affected the cost of rebuilding your home – and the possible need to adjust your insurance coverage upwards.

High costs for materials and labor

Most home insurance policies have a provision that automatically adjusts the insured value of a home for inflation, increasing it by, say, 3% year over year. But these standard increases may not be sufficient at this time, given the escalating costs of reconstruction.

“It’s about supplies, materials – they’ve increased dramatically because of the pandemic,” says Robin Jaekel, vice president of personal insurance at brokerage Glenn Insurance, based in Absecon and Malaga, NJ.

Earlier this year, it was estimated that then higher lumber prices could add nearly $ 36,000 to the cost of building a new home compared to typical years, according to the National Association of Home Builders.

While lumber prices have fallen by about 70% from stratospheric levels they reached in early 2021, they are still above pre-pandemic standards – and the prospect of further increases cannot be excluded if the Delta variant triggers labor shortages or forest fires. harm supply chains.

And lumber is not the only building material for which the shortage is affecting prices. Since May 2020, according to the National Association of Home Builders, the cost of steel mill products has increased by more than 75% and the cost of prepared asphalt and tar roofing and siding products by nearly 15%.

Labor costs have also risen, experts say, due to demand for increased renovations and, in some areas, extensive reconstruction after wildfires and other natural disasters.

Growth in home renovations and additions

The pandemic has prompted many other existing homeowners to make renovations that improve or expand their living space, especially if the whole family lives, works and learns there.

According to The Hanover Insurance Group, just over half (54%) of homeowners have made improvements or undertaken renovations during the pandemic, and more than two-thirds (69%) plan to do so in the next year.

That’s a lot of investment in American homes, but home insurance coverage is not keeping pace. “When people do these renovations, they increase their replacement costs,” Lavey says. Yet the Hanover study found that only 40% of homeowners who undertook major renovation projects contacted their insurance companies to adjust their coverage levels to reflect the value of their home taking into account new improvements. .

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Your insurance upgrade options

This is a good time to talk to your insurer or broker to make sure there is no gap in coverage in your home insurance policy.

You can simply increase the insured value of your home to close the gap. But depending on the type of coverage you have, the increase in value could still make you vulnerable to future cost variances.

The most basic type of coverage, known as an actual cash value policy, takes into account depreciation of components in the home – its roof, for example, or kitchen appliances. To guard against depreciation, many homeowners purchase what’s called enhanced replacement cost coverage, which allows the payment to exceed the home’s insured value, typically 25-50%. Of course, that buffer comes at a price – a 10% premium increase is typical, says Nancy Albanese, vice president of personal insurance at BMT Insurance Advisors.

Next come the Guaranteed Replacement Cost policies, a further improvement that ensures your home will be restored as close to its original condition as possible, regardless of cost. This ultimate coverage can add an additional 20-25% to your premiums, says Albanese, but protects those with very high-end appliances and finishes, such as granite countertops or marble floors.

“We would say you really need to talk to a professional and help estimate the cost of replacing your home,” says Lavey. “Today, with the advancements in analytics and the availability of third-party data, we are getting smarter and smarter about this topic. And while there is nothing you can do about price inflation, you can make sure your home is protected from its effects in the event of a disaster.

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