Why Covid Means Higher Home Insurance Costs
Anna and Luke are having a tough time building a deck onto their Barnegat, New Jersey, home. Some contractors don’t return phone calls, while others offer “take it or leave it” prices if they do call back. Meanwhile material prices—particularly lumber and cement—are mounting by double digits. The couple finally found a builder, but they have to stay home waiting for workers who show up sporadically, stay a few hours, then leave for another job.
Most of their problem traces back to the Covid pandemic, which will soon enter into its third year. Not only is it stifling the supply chain and adding to a shortage of trained labor, it’s creating an added demand for new construction by those wanting to remodel, rebuild or, in some instances, buy a new home in what they hope will be a safer place.
The consequences of Covid are also increasing the cost to insure homes—in some cases even more than the wave of inflation now engulfing the country. In California, Florida and Louisiana, insurance premiums spiked an average of 20% to 30% during the past year, according to the Insurance Information Institute. The current inflation rate is about 6%.
Despite the surge in homeowners insurance rates, many in the industry feel that the Covid crisis is manageable. “Covid-19 premium insurance effects will eventually wane,” says Bob Hertel, who handles product development for Acuity Insurance. “Material and labor shortages will likely catch up with demand and these trends are already occurring.”
While he admits that this comes with yet more inflation, “many economists believe high inflation trends are transitory and will return to normal in two years.”
And the chief economist for the National Association of Realtors (NAR), Larry Yun, predicted that home prices, which rose by 12% on average in 2020 and 2021, may normalize in 2022.
Omicron Adds to Financial Woes
Covid shows no signs of waning. Instead, it’s generating new forms of itself, such as the Omicron variant, which sent shock waves through the stock market, causing it to plunge 900 points the day after Thanksgiving—the biggest single trading day loss of the year. Another eerie factor: Many countries have closed their borders to other nations, which is likely to prolong supply chain shortages.
While President Biden says Omicron is “not a cause for panic,” the World Health Organization has so far said its risk is “very high” and could lead to surges with “severe consequences.” In testimony to Congress on the last day of November, Federal Reserve Chair Jerome Powell repeated the familiar threats: Omicron could “intensify supply-chain disruptions” and “slow progress in the labor market.”
Even though 18 million jobs have been created since the U.S. emerged from its first lockdown in 2021, the country is still grappling with an employee shortage.
Ultimately, skilled labor shortages and higher material costs weigh on home insurance buyers. “Home insurance is not tied to the market value of a home, but based on reconstruction cost,” says Jeff Brewer, of the American Property Casualty Insurance Association. This means that not only are premiums rising—already $1,400 a year on average—but also some homeowners might not be aware that they are underinsured.
The “dwelling” coverage limit stated on your home insurance policy is the maximum amount your insurer will pay to rebuild your house. If your dwelling coverage limit doesn’t reflect current labor and material costs—and you experience a disaster such as a house fire—guess who has to make up the shortfall when insurance isn’t enough? That’s right, the burden falls to the homeowner.
While Covid isn’t the only problem, it amplifies the other issues confronting insurers. Many American-based insurers continue to shun the “global warming” label because of its political connotations, but they are well aware that it exists. “We’re seeing more expensive catastrophic events across the U.S. this year, including 18 weather disasters with losses that each exceed $1 billion,” says Friedlander at the Insurance Information Institute. No matter how you define weather changes, this “increased risk” is likely to continue, say insurers.
Both Covid and the influx of bad weather have driven insurers to be more concerned about their bottom line—profits, or the lack thereof. Major property-casualty insurers will survive, but the rate of return on their net worth is only about half the rate of all Fortune 500 companies, according to Acuity’s Hertel.
And for smaller home insurance companies, particularly those in storm paths and Covid-ravaged states, the prospects are more bleak. In November, one of the largest insurers in the Southeast, FedNet Insurance, announced that it would not renew homeowners’ policies in Louisiana and Texas in 2022 due to insurance claims from severe storms. And two other Louisiana insurers, Access Home Insurance and State National Fire Insurance, have recently been put into receivership.
Friedlander adds that in his home state of Florida, only three of its 52 local insurers have shown a profit.
Adjusting for the New Normal
What if Covid continues, along with horrific weather events like Hurricane Ida, which crossed the country from Louisiana to New York City in 2021, causing 95 fatalities in the U.S. and more than $65 billion in damage?
The certainty: Home insurance premiums will likely rise even if your coverage level stays the same. But are you underinsured as well? Ask your home insurer to re-evaluate the cost to rebuild your house, and check that cost against your current coverage limit.
If you’re currently underinsured, here are options to consider:
- Stick with the current insured value of your home and take your chances, even if it doesn’t reflect the inflated cost of rebuilding your home. You likely also have a deductible that would reduce your compensation from an insurance claim.
- Increase your dwelling coverage limit and offset the additional cost a bit by raising your deductible. In the end, if you have a large claim, more cost burden will still be passed on to you.
- Upgrade your home insurance policy to “extended replacement cost,” if your home insurer offers this feature. If your dwelling coverage falls short, “extended replacement cost” coverage kicks in to add more money for rebuilding. Some companies limit this to 25% extra, and in areas of widespread destruction like Louisiana, that still might not be enough. Companies such as Chubb, Erie and Farmers offer this.
- Upgrade to “guaranteed replacement cost” if your home insurance company offers it. This ensures that the insurer will pay to rebuild your home no matter the cost. In cases of widespread disasters, when labor and materials are in peak demand, this kind of coverage protects you from outrageous cost increases. Companies such as Auto-Owners, Acuity, AIG and The Hanover offer this.
While no one will be happy about another higher bill these days, the right home insurance protection pays off in spades when disaster hits.