Why rebuilding costs are higher after a catastrophe

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Following a major catastrophe, demand increases for labor and materials to rebuild houses and businesses. Often, insurance companies are forced to pay higher prices to cover claims costs. If those inflated prices exhaust the limits of your home insurance coverage, you could end up footing some of the bill with your own money.

According to Milliman, a financial risk management company, the industry benchmark for increase in construction costs after a catastrophe is 20%, due to demand surge. Because so many repairs are needed at once, a strain is put on the contractors and materials manufacturers, resulting in higher costs and slower work. On top of that, inflation has already driven prices up in many areas, compounding the problem.

That can affect you as a homeowner if you don’t carry enough replacement cost coverage on your home.

Key Takeaways

After a catastrophe like a hurricane, demand surge causes the cost of rebuilding to go up.
The average increase in costs due to demand surge is 20%.
Carrying extended or guaranteed replacement cost coverage on your home can prevent out-of-pocket costs.

How do catastrophe repair demand surges affect costs?

Industry experts attribute increases to a shortage of local labor, raw materials becoming scarce, difficulty of shipping into a disaster zone and price gouging (which is illegal). Whatever the reason, it’s a costly irritant for the insurance industry. It can also affect the homeowner, who might suddenly find their insurance coverage inadequate.

“That could happen in these types of cases and in any case of a total loss,” says Madelyn Flannagan, former vice president of agent development, education and research for the Independent Insurance Agents and Brokers of America. “That is why it is very important for a homeowner to work with their agent to make sure that their coverage is adequate . . . in no case would the [insurance] company pay more than the policy limit.”

Let’s say you have a home insurance policy with $200,000 in dwelling coverage that covers wind and hail damage. If a hurricane blows through your neighborhood and your home suffers a total loss due to wind damage, your insurer will only pay up to $200,000 — which you believe will be adequate. But if prices for labor and material climb up significantly, chances are that your house will cost much more to rebuild. That could easily mean thousands of dollars out of your own pocket.

How can you protect yourself from surges in rebuilding costs?

No matter where you live, but especially if you live in a high-risk area such as Louisiana, Texas or Florida, make sure you have enough home insurance coverage to allow for sudden increases in building costs.

The first step is to review your home’s replacement cost annually and update your coverage accordingly. Go over any changes you have made to the home that affect rebuilding costs, like upgrades or remodeling.

Next, consider an endorsement that adds extra coverage.

Extended and guaranteed replacement cost endorsements

Most insurance companies offer an endorsement that allows you to extend coverage beyond the policy limits. Extended replacement cost endorsements usually add a set percentage on top of the dwelling coverage limit. It’s usually 25% or 50%.

So, if you have $300,000 in dwelling coverage and choose a 125% extended replacement cost endorsement, the total available coverage would be $375,000.

You may also be able to purchase a guaranteed replacement cost endorsement, which will pay the total amount to rebuild the home regardless of how much the costs exceed the coverage limit.

“Not all companies offer it, but it’s something you need to talk to your agent about,” Flannagan says.

Extra costs could come out of your own pocket

If your home is badly damaged during a natural disaster, you will be required to rebuild it to meet new building codes — which are often stricter and costlier. For example, a home built in the 1950s will be more expensive to rebuild because it will have to meet current building codes. Some insurance companies offer a “rebuilding ordinance or law coverage” rider, Flannagan says. The coverage pays a specific amount toward these upgrade costs.

Whether or not your town is hit by a natural disaster, it’s a good idea to make sure your home insurance policy is keeping pace with current rebuilding costs. If your home insurer doesn’t automatically reevaluate your coverage limit at renewal time, ask them to do so.

Sources

Milliman. “A tale of two catastrophes: Demand surge and inflation put property insurers in a bind.” Accessed May 2024.

Michelle Megna

Contributor

Michelle, the former editorial director, insurance, at QuinStreet, is a writer, editor and expert on car insurance and personal finance. Prior to joining QuinStreet, she reported and edited articles on technology, lifestyle, education and government for magazines, websites and major newspapers, including the New York Daily News.