Why Covid Means Higher Home Insurance Costs

Anna and Luke are struggling to add a deck to their Barnegat, New Jersey, home. Some contractors do not return phone calls, while others provide "take it or leave it" pricing if they do. Meanwhile, material prices are rising by double digits, particularly for lumber and cement. The couple finally found a builder, but they must remain at home while workers arrive infrequently, stay for a few hours, and then leave for another job.

The majority of their problems can be traced back to the Covid pandemic, which is now in its third year. Not only is it suffocating the supply chain and contributing to a labor shortage, but it is also increasing demand for new construction from those looking to remodel, rebuild, or, in some cases, buy a new home in what they hope will be a safer place.

The consequences of Covid are also raising the cost of home insurance—in some cases, even more than the current wave of inflation sweeping the country. According to the Insurance Information Institute, insurance premiums increased by 20% to 30% on average in California, Florida, and Louisiana over the last year. The current inflation rate is around 6%.

Despite the increase in homeowners insurance rates, many industry insiders believe the Covid crisis is manageable. "The Covid-19 premium insurance effects will eventually fade," says Bob Hertel, product development manager at Acuity Insurance. "Material and labor shortages will almost certainly catch up with demand, and these trends are already taking place."

While he admits that this will result in additional inflation, he believes that "many economists believe high inflation trends are transitory and will return to normal in two years."

And Larry Yun, chief economist for the National Association of Realtors (NAR), predicted that home prices, which rose by 12% on average in 2020 and 2021, may begin to level off in 2022.

Omicron Adds to Financial Woes

Covid shows no signs of slowing down. Instead, it's creating new versions of itself, such as the Omicron variant, which sent shockwaves through the stock market, causing it to plummet 900 points the day after Thanksgiving—the year's largest single trading day loss. Another unsettling factor is that many countries have closed their borders to other countries, which will likely prolong supply chain shortages.

While President Biden has stated that Omicron is "not a cause for concern," the World Health Organization has stated that the risk is "very high" and that it could cause surges with "severe consequences." In testimony to Congress on November 30, Federal Reserve Chair Jerome Powell reiterated familiar warnings: Omicron could "intensify supply-chain disruptions" and "slow labor-market progress."

Despite the fact that 18 million jobs have been created since the United States emerged from its first lockdown in 2021, the country is still facing an employee shortage.

Finally, skilled labor shortages and rising material costs put a strain on home insurance buyers. "Home insurance is based on reconstruction cost, not market value," says Jeff Brewer of the American Property Casualty Insurance Association. This means that not only are premiums rising (they are already $1,400 per year on average), but some homeowners may be unaware that they are underinsured.

The "dwelling" coverage limit on your home insurance policy is the most your insurer will pay to rebuild your home. If your dwelling coverage limit does not reflect current labor and material costs, and you have a disaster, such as a house fire, guess who has to make up the shortfall when insurance is insufficient? That's right, the onus is on the homeowner.

Billion-Dollar Disasters

While Covid is not the only issue, it exacerbates the other issues that insurers face. Many insurers in the United States continue to avoid the term "global warming" because of its political connotations, but they are well aware that it exists. "We're seeing more expensive catastrophic events in the United States this year, including 18 weather disasters with losses exceeding $1 billion," says Friedlander of the Insurance Information Institute. According to insurers, regardless of how you define weather changes, this "increased risk" is likely to continue.

Both Covid and the influx of bad weather have made insurers more concerned with their bottom line—profits, or lack thereof. According to Acuity's Hertel, major property-casualty insurers will survive, but their rate of return on net worth is only about half that of all Fortune 500 companies.

Smaller home insurance companies, particularly those in storm-prone areas and Covid-ravaged states, face even more bleak prospects. FedNet Insurance, one of the Southeast's largest insurers, announced in November that it would not renew homeowners' policies in Louisiana and Texas in 2022 due to insurance claims from severe storms. In addition, two other Louisiana insurers, Access Home Insurance and State National Fire Insurance, have recently gone bankrupt.

Friedlander adds that only three of the state's 52 local insurers have turned a profit in his home state of Florida.

Adjusting for the New Normal

What if Covid persists, along with horrific weather events such as Hurricane Ida, which crossed the country from Louisiana to New York City in 2021, killing 95 people and causing more than $65 billion in damage?

The certainty: Even if your coverage level remains unchanged, your home insurance premiums will most likely rise. But are you also underinsured? Request that your home insurer re-evaluate the cost of rebuilding your home and compare that cost to your current coverage limit.

If you are currently uninsured, consider the following options:

Stick with your current insured value and take your chances, even if it does not reflect the inflated cost of rebuilding your home. You most likely have a deductible, which reduces your compensation from an insurance claim.
Increase your dwelling coverage limit and lower your deductible to offset the additional cost. Finally, if you have a large claim, the cost burden will 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 is insufficient, "extended replacement cost" coverage kicks in to provide additional funds for rebuilding. Some companies limit this to 25% more, which may not be enough in areas of widespread destruction like Louisiana. This is provided by companies such as Chubb, Erie, and Farmers.
Upgrade to “guaranteed replacement cost” if your home insurance company offers it. This guarantees that your insurer will pay to rebuild your home regardless of the cost. In the event of a widespread disaster, when labor and materials are in high demand, this type of coverage protects you from exorbitant price increases. This is provided by companies such as Auto-Owners, Acuity, AIG, and The Hanover.

While no one wants to pay another higher bill these days, the right home insurance coverage pays off in spades when disaster strikes.