Will Your Homeowners Insurance Cover a Disaster?

Attention homeowners!

Are you among the 60% of homeowners who are now underinsured due to rising building costs and inflation?

Are you prepared to pay tens of thousands of dollars out-of-pocket to rebuild your home if you suffer from a devastating fire, hurricane, or other natural disasters?

Did you renovate or remodel your home during the pandemic?

Most homeowners haven’t added additional homeowners insurance to their policies to cover these risks, which means they’re underinsured and have failed to account for the following:

Skyrocketing Construction Costs
Rising Inflation
High Interest Rates
Labor Shortages
Supply Chain Disruptions
Increasing Demand
Climate Change

Unfortunately, these rising risk factors are only projected to continue.

What does it mean to be underinsured?

Simply put, if your home is underinsured, you don’t have enough homeowners insurance coverage to get fully reimbursed to rebuild your home or replace your belongings after a disaster such as a fire, hurricane, or other covered loss.

You’ll have to pay out-of-pocket to cover these costs.

If your coverage limits are too low for any one of the following standard home insurance policies, you may be underinsured:

Dwelling Coverage
Coverage for Other Structures
Personal Property Coverage
Loss of Use Coverage
Personal Liability Coverage

The cost to replace your home is based on rebuilding it to its pre-loss condition, not its market value.

For most homeowners—60%–it is now more expensive to rebuild than when you initially purchased your homeowners insurance policy; the insurance coverage that used to protect you probably isn’t enough anymore. Homeowners need to know how to insulate themselves from the rising risk of an underinsurance disaster.

Luckily, this guide will help you navigate the challenging homeowners insurance policy landscape and protect you and your home if the unexpected becomes your reality.

Topics Covered

6 Reasons Why Your Homeowners Insurance Premiums are Rising
4 Types of Homeowners Insurance Coverage
4 Ways to Calculate Home Value
How to Be Financially Prepared for an Underinsurance Disaster

6 Reasons Why Your Homeowners Insurance Premiums are Rising

First, it’s important to understand why home insurance premiums are rising.

In 2022, homeowners in every state witnessed an average increase of 12.1% in home insurance rates. Why did this happen, and why is the trend forecasted to continue through 2023 and beyond?

#1 – Rising home values and construction costs are two of the biggest drivers of increasing premiums in the event of a loss. While there’s no way to predict an unforeseeable event, there are actions you can take to protect yourself, namely reviewing your policy with one of our local agents.

#2 – Inflation continues to be unpredictable, which means homeowners insurance is expected to remain higher than its historical averages, largely due to the continued high prices of construction materials and continuing labor shortages.

#3 – Climate change is another factor. Even insurance companies need to purchase insurance, which is called reinsurance. Reinsurance transfers some risk of insuring their customers to another insurance company, the reinsurer.

Reinsurance is a global market, which means that a natural disaster on the other side of the world can affect rates locally. Insured natural catastrophe losses averaged about $100 billion over the past five years. A stunning 71% of the losses occurred in North America. Natural disasters such as hurricanes, wildfires, and unpredictable weather are adding to the record-setting number of claim payouts and contributing to increasing insurance coverage rates.

To protect themselves against financial losses, reinsurers pass their costs on to insurers in the form of higher premiums … which are then passed on to you, also in the form of higher premiums.

#4 – Older homes may be due for upgrades. Water damage claims are among the most expensive types of home insurance claims. A burst pipe or a leaking roof can cause significant and costly damage. If an inspection reveals that you need a new roof or plumbing work, your rates may increase.

#5 – Attractive Nuisances. Insurance companies consider “attractive nuisances” anything that attracts people onto your property. Common examples of these types of nuisances may include:

Trampolines
Swimming Pools
Pets
Open Water
Playground Equipment
Construction Projects
Sand or Gravel Pits
Expensive/Extra Cars
Old Appliances

Removing these nuisances may help lower your insurance costs.

#6 – Your insurance score? This score represents the statistical likelihood of you having to file a claim. Insurers determine your insurance score by reviewing the following factors, among others:

Long-Established Credit History
Many Open Accounts in Good Standing
No Late Payments
No Past Due Accounts
Low Use of Available Credit

Conversely, credit factors that can reduce your insurance score typically include:

Collection Accounts
Many Past-Due Payments Owed
High Use of Available Credit
Too Many Recent Applications for Credit

4 Types of Homeowners Insurance Coverage

Typically, there are four types of homeowners insurance coverage offered by insurers:

Actual Cash Value
Replacement Cost
Extended Replacement Cost
Guaranteed Replacement Cost

Each type of home insurance coverage has various ways to get reimbursed if your home is damaged or destroyed.

There are two important reasons why homeowners need to understand what the replacement cost of their home is should disaster strike.

First, it will help you determine what the appropriate insurance coverage limits are for your home. Second, it will ensure that you get sufficiently reimbursed if you have to file a claim.

#1 – Actual Cash Value
Actual Cash Value accounts for depreciation before it pays out reimbursement. It typically provides a low level of protection and may result in high out-of-pocket expenses.

#2 – Replacement Cost
Replacement Cost is a step up from Actual Cash Value. It doesn’t factor in depreciation and typically covers your home and the property inside your home. It will repair your home with similar materials to what existed before the damage was incurred.

#3 – Extended Replacement Cost
What if the coverage amount on your home insurance policy doesn’t cover your rebuilding costs?

Remember that over 60% of homeowners are now underinsured due to changes in the insurance market.

Extended Replacement Cost goes even further than either Replacement Cost or Actual Cash Value. Your home coverage is still set at a specific amount, but it adds extra protection as a percentage over your coverage amount.

For example, if your home costs $300,000 to rebuild, but your Extended Replacement Cost policy provides an extra 20% of coverage, you would be covered for up to an additional $60,000.

However, not all insurance companies offer this type of coverage.

#4 – Guaranteed Replacement Cost
Guaranteed Replacement Cost, often considered the “gold standard” of home insurance coverage, covers rebuilding costs that may exceed your coverage amount. It insulates you from having to pay out-of-pocket for replacement costs. It is designed to cover a property wholly and completely.

4 Ways to Calculate the Replacement Cost of Your Home

Let’s imagine for a moment that your home has suffered a disaster. You need to know what it’s worth to ensure you get adequately reimbursed.

But what impacts the replacement cost of your home? Some of the most common factors are:

Cost of Building Materials
Square Footage
Number of Rooms, Bathrooms & Bedrooms
Interior Features (Cabinetry, Fixtures, Built-in Appliances, etc.)
Finished Spaces like Basements or Attics
Roof Type
Foundation Type
Age of Home
Renovations
Additions

That said, how can you calculate the replacement cost of your home?

#1 – Cost x Square Footage = Estimated Replacement Cost
The simplest way to calculate the cost of rebuilding your home is with the following formula:

Determine the local rebuild cost for your area.
Multiply that cost by the square footage of your home.

For example, the cost to build a 2,000-square-foot home in Vermont is roughly $225-$400 per square foot, so that the price range might look like:

Lowest Rebuild Cost: 2,000 square feet X $225 = $450,000
Highest Rebuild Cost: 2,000 square feet X $400 = $800,000

Your replacement cost would be between $450,000 and $800,000; however, costs will be influenced by variables such as:

Location
Property Type
Labor Costs
Material Costs

#2 – Online Replacement Calculators
Online replacement calculators like these from Policy Genius can help you determine what the replacement cost of your home might be, as well helping to determine the following:

Value of Personal Belongings
Value of Assets
Coverage Amount Needed

#3 – Insurance Provider Estimates
Your homeowners insurance policy includes your insurer’s replacement cost estimate, which accounts for unforeseen disasters. Insurers have tools and methodologies for estimating your home’s replacement cost value, which accounts for information in your insurance application, property data, and third-party data.

#4 – Get a Contractor or Appraiser Quote
This route is perhaps the most accurate one to choose for many homeowners. A licensed, professional building contractor can assess what goes into a rebuild in great detail. They should be able to assess the inside and outside of your home thoroughly. However, it’s generally the most expensive option.

How to Be Financially Prepared for an Underinsured Disaster

A recent survey by the American Property Casualty Insurance Association (APCIA) found that most insured homeowners—about 60%–are at risk of being underinsured.

Increased building costs, reconstruction delays, and high inflation have created a situation where many policyholders will be underinsured if catastrophe strikes.

So, how can you be financially prepared for a disaster that puts you out of your home?

These key insurance coverage features can help protect you:

Annual Inflation Adjustment automatically adjusts your coverage when you renew to keep pace with rising costs.

Extended Replacement Cost will increase the coverage to rebuild your home when building costs rise after a natural disaster.

Building Code/Ordinance Coverage increases coverage to comply with new building codes or green energy ordinances when building costs rise after a natural disaster.

Loss of Use Coverage helps pay for living expenses if you have to be out of your home during its repair.

In addition, homeowners can take the following actions to ensure they’re covered:

Conduct an annual review of your insurance policy with a local insurance expert.
Update your policy annually to ensure you have enough coverage.
Create a home inventory to ensure you’ll be reimbursed for assets inside your home. Update this document annually.

Is your home underinsured?

Do you have the coverage you need?

Contact us or find an agent near you today to learn how we can customize your home insurance policies to meet your needs.

*Disclaimer: We offer content for informational purposes; Co-Op Co-operative Insurance Companies may not provide all the services or products listed here. Please contact your local agent to learn more about how we can help with your insurance needs.