Are construction costs raising the cost of homeowner’s insurance?

Written by: Mike Tonsetic

Are construction costs raising the cost of homeowner’s insurance? Yes, but not how you think…

‘Underinsurance’, meaning not enough insurance covering a property, is the indirect cause raising homeowner’s insurance rates nationally. How? When a home is underinsured, you create a litigious environment surrounding any claim, no matter if it is a total loss by fire, or a <$10K water damage claim. Why? Simply put, as people living in a modern society, a democracy no less, we want what is fair & owed and those who are responsible to be held accountable. So, why not sue right?

Now that we’ve underinsured a whole lotta homes, especially amid this national real estate boom we are experiencing from these fire sale interest rates, and created this litigious minefield, the associated costs of these collective claims have inflated like a balloon that is a few breaths past its expiration date. Anytime attorney’s fees are awarded, the rule of thumb is you can add 4X multiple to the claim settlement, and they’ve usually tapped into coverages as bonuses that the homeowners didn’t even know they had. Remember, the argument here all started with, ‘What do you mean I don’t have enough coverage?’

But we’re not going to place the blame solely on the attorneys here, the insurance industry & the banks are equally at fault. When you factor in the fact that 99% of insurance agents out there care about only one thing: commission, their only value proposition to the average consumer is to sell at the lowest price humanly possible, and well, the only way to really do beat out 99 other agents is to start chopping away at the coverage tree. Then when you compound this practice with a lender’s debt-to-income (DTI) ratio, the first line item on the bank’s chopping block is the insurance policy. Afterall, everyone in the transaction tree here is compensated on a commission basis.

This may sound like a vicious circle, and it is, and it can all be boiled down to (2) clear facts: 1) No-one is going to watch out for you (unless of course you find that diamond-in-the-rough insurance agent) & 2) the actions of one can always directly influence and affect the many.

So, what can you do to protect yourself and probably your most valuable asset? Well, a good start is to ask the right questions. Until recent legislation, there was a proprietary underwriting report called the Replacement Cost Estimator (RCE for short), a ‘flexible’ headshot for a home that was passed between insurance companies & agent, the banks, and even the homeowners. In theory, the report uses national databases and algorithms to calculate the constructions cost associated with replacing a home. Now, you can use the term ‘flexible’ to mean adjustable to either inflate, or more commonly deflate the final figure. In other words, the report is only as good as the ethics of the user and the integrity of the data being aggregated into said report.

Since insurance companies were never in the practice of releasing this proprietary information in the first place, and given it’s been used & abused over the years, you’re never going to get your eyes on word going forward with the recent industry reform. However, there are a couple of simple rules to follow to help assure your home is insured properly:

  • REMEMBER: What you can buy or sell your home for is irrelevant to what it costs to repair, rebuild, or replace.
  • Any home insured for $150 per sq. ft. of living area in this market makes you ‘underinsured’
  • The older the home, the higher your coverage should be
  • The more customized the home, the higher your coverage should be
  • The more detail the insurance agent uses in the calculation, and the less assumptions, the more accurate the final calculation will be.
  • It’s NOT rocket science

Again, albeit you will never see this calculation, you can ask questions, and it’s really up to you to do so and make the agent work for you, if of course you cannot find one that actually works for their commission.


To read more about Homeowner’s Insurance, read our previous blog, HERE!

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