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Rising Repair Costs: Has Your Homeowner’s Insurance Kept Up?

If you think the inflation at the supermarket is bad, it's mild compared to the record increases in construction costs. 

Why does that matter if you're not building a home? Well, if you're a homeowner, those construction costs also affect the price of any home repairs you may need. While you may count on insurance to cover damage to your home, soaring repair costs mean you may need to look at your coverage limits to see if they suffice.

The resulting coverage gap could cost you dearly out-of-pocket should you need to file an insurance claim to repair damage to your home from bad weather, a fire or other covered misfortune. 

To make sure you're protected, this article will show you a quick, two-step method to see if you have a coverage gap in your existing home insurance policy. Then, it will explain how you might be able to close that gap without paying more for homeowner's insurance. 

Inflation Alert: Record Rise in Construction Costs

Overall, consumer inflation rose by 7.0% last year. That's pretty bad - the highest annual inflation rate in nearly 40 years. But the picture gets worse when you look at construction costs.

If you’re a homeowner, rising construction costs also affect the price of any home repairs you may need.

The US Bureau of Labor Statistics has tracked a construction cost component of its Producer Price Index since 2009. In those dozen years, there has never been anything close to 2021's 12.4% rise in construction prices. The biggest annual increase in construction prices before last year was less than half of that.

With continuing supply chain bottlenecks and labor shortages, there may be no end in sight to these soaring construction costs.

What Do Rising Construction Costs Mean to Homeowners?

Naturally, skyrocketing construction costs matter a great deal if you plan on building a house. But what if you already own a home?

Well, those same costs are likely to raise the price of any repairs you may have to make if your home is damaged. After all, the types of materials and labor involved are the same. 

If you suffered major damage to your home, you would turn to your home insurance. But when was the last time you looked at how much your homeowner's policy would actually cover?

Have Your Home Insurance Coverage Limits Kept Up With Inflation?

One of the main reasons for having homeowner's insurance is to pay for repairs of certain types of damage to your home. The causes of damage that are covered depend on the type of policy you have, but generally there are limits on how much coverage you have – that is, how much the insurance company will pay out for repairs. 

Getting that coverage limit right is important. Set the limit too high, and your premiums will probably be more expensive than they need to be. Set it too low, and you could find yourself paying tens of thousands of dollars out of pocket in the event of major damage to your home.

What is "just right" when it comes to damage coverage? It doesn't really have a lot to do with the market value of your home. It has more to do with the replacement value of the property - what it would cost to rebuild it.

When you buy a homeowner's policy, the insurance company will do some analysis of the property to estimate what it would cost to rebuild the home and other structures on it. Based on that, your insurance agent will recommend a coverage limit. However, this amount can easily change with inflation.

Ways Your Homeowners Coverage Limits Could Become Too Low Due to Inflation

  1. Not all homeowner's policies automatically update coverage limits for inflation. If you got a policy with a $250,000 coverage limit ten years ago, thanks to rising repair costs you would now need about $350,000 in coverage to repair the same amount of damage. If your coverage limit has not been updated, that could leave you paying $100,000 out of pocket if your home is destroyed.

  2. Some policies are designed to adjust coverage limits automatically over time, but these adjustments are typically based on a normal rate of inflation – more or less 2% to 4% per year. Last year's 12.4% rise in construction costs was anything but normal, so a routine adjustment would leave your coverage limit far behind.

  3. When repair costs are rising as quickly as they have been lately, the timing of inflation adjustments matter. If your coverage limit updates once a year when your policy is renewed, you could be more than 10% behind replacement cost by now if it's been several months since your last renewal. 

If you got a policy with a $250,000 coverage limit ten years ago, you would now need about $350,000 in coverage.

Use SmartFinancial's 2-Step Home Insurance Calculator to See Your Coverage Needs 

SmartFinancial has an easy-to-use tool to show whether your homeowner's coverage has fallen badly behind inflation. 

All you need to do is enter two pieces of information:

  1. How many years ago did you review the rebuild costs and limits on your policy?

  2. How much dwelling coverage did this version of the policy originally have?

Once you've entered that information, the tool will adjust your original coverage for rising costs to show how much money it would take today to cover the same amount of repairs. This adjustment is based on the Construction component of the Producer Price Index

If your current coverage limit is far behind this adjusted amount, you have a coverage gap that may be putting you at serious financial risk.

What To Do if You Have a Coverage Gap

If the calculator shows you may have a coverage gap due to inflation, there are two ways to address it:

  1. Talk to an insurance agent about reassessing your property to make sure your coverage limit is more in line with today's replacement costs.

  2. Sign up for a new policy that guarantees full replacement with no cap.

In either case, the one thing you'd have to watch out for is that these policy upgrades could mean paying higher premiums. The best solution would be to increase your coverage without raising your premium.

Home Repair Costs and Coverage FAQs

How much damage does homeowner's insurance cover?

Look at your current policy to see your coverage limits. Note that this may be separated into different categories: damage to the home itself (dwelling coverage), damage to other structures on the property, and damage to possessions within the property (contents or belongings). Inflation would affect your dwelling coverage and other structures coverage the most because they may require repairs and rebuilding. 

Is my insurance coverage limit based on the value of my home?

Property values and replacement cost are different things, and your insurance should be based on estimated replacement cost. After all, the purpose of the policy is to repair damage to your home or to rebuild it.

Does my homeowner's insurance adjust for inflation?

Some policies do and some don't. Even when they do, in periods of very high inflation for building materials and other construction costs, coverage limits may not adjust far enough or fast enough to keep up with the rise in replacement costs. 

Is inflation the only reason to raise my homeowners insurance policy coverage limits?

No. Besides rising repair costs, it may cost more to fix your home if you have made significant improvements to the home. Naturally, additions or upgrades to materials and equipment would raise the total cost of repairing the home should it be damaged. So, besides the unusually high rate of construction cost inflation recently, if you've made home improvements since your coverage limits were last assessed it should be a cue to shop for an updated policy

Raise Your Coverage Without Raising Your Premium

You shouldn't make a change like increasing your coverage limit without shopping around and comparing quotes for the best value. Insurance is a very competitive business, so it often pays to look for a lowest quote for the most coverage.

Getting fresh, competitive quotes might enable you to raise your level of coverage without increasing the cost of your insurance premiums. At the very least, it should minimize the cost difference of raising your coverage to an appropriate level. For free homeowners insurance quotes and a consultation on coverage limits, enter your zip code below and answer a few questions.

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