NYC Insurance Blog

Understanding Reconstruction Costs and Your Homeowners Insurance

Understanding your homeowner’s insurance is crucial because such knowledge comes in handy when disaster strikes. The first component of your homeowner’s insurance is Dwelling coverage, also known as Coverage A. This coverage protects your home and any attached structures, for example, the deck or attached garage. When setting the Dwelling coverage amount, avoid choosing your home's current market value or purchase price! It is essential to understand that the reconstruction costs refer to the total cost of rebuilding your home as it was before. Ergo, ensure your Dwelling coverage is equal to the reconstruction cost estimate (RCE) to avoid paying the difference out of pocket.

Homeowners insurance premiums fluctuate with time. Recently, homeowners’ insurance premiums have gone up, affecting reconstruction costs. Having a Broker to explain the ins and outs of replacement costs will make picking insurance much easier! Give us a Call TODAY! Here are three reasons why reconstruction costs are rising:

Spikes in Materials Cost

COVID-19 affected the cost of supplies and labor, causing a surge in cost and demand. For example, according to the National Association of Home Builders, lumber prices have affected the cost of rebuilding a home. As the cost of supplies rises, the cost of rebuilding a home also increases. Secondly, when disaster strikes, such as a tornado or wildfire, the demand for rebuilding or repairing homes affects the local building costs. Therefore, the supply and demand of labor and materials increase, affecting the reconstruction costs. 

Change in Labor Rates

Labor rates are skyrocketing, thus increasing the cost of rebuilding your home. According to recent statistics, hourly retail labor rates increased from 3.8% to 4.1% (from July 2020 to July 2021). Some states pay higher hourly rates than others, depending on factors like the cost of living, experience, and skills. Although it is not bad for laborers to demand higher wages, higher labor rates increase reconstruction costs in case of a disaster.

Tariffs and Trade Barriers

Tariffs refer to the taxes on either imports or exports. Typically, tariffs are paid by consumers, and they raise the prices of imported products. Other trade barriers affecting the cost of building materials include licenses, standardization, or quotas. Tariffs and trade wars are imposed to promote local goods by making foreign goods available in limited supply or more expensive. In recent years, the United States imposed new and higher tariffs on lumber, aluminum, and steel from certain countries, affecting reconstruction costs. 

Reviewing Your Home Insurance Coverage

Nowadays, most homeowners do not take the necessary steps to ensure their home insurance coverage keeps up with inflation and current building costs. If your insurance is out of date, you could be underinsured. Follow these tips to ensure your home insurance coverage is up to date:

1. Get inflation adjustment coverage to get automatic updates at the renewal time, depending on the current inflation.
2. Contact your insurer to re-evaluate your coverage amount depending on the current rebuilding costs.
3. If your insurer offers it, add a guaranteed or extended replacement coverage to your homeowners policy. Guaranteed replacement coverage ensures you get extra coverage above the Dwelling coverage limit if it turns out you are underinsured. Give us a call today, let us help you with your Homeowners!

Final Verdict

Knowing your reconstruction cost estimate helps you determine the correct Dwelling overage limit on your homeowners insurance in case you need to rebuild your home from scratch. Since reconstruction costs have been rising recently, revisiting the Dwelling coverage limit on your policy is highly recommended.

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