How the Rising Cost of Building Materials is Changing Insurance Coverage

From the global COVID-19 pandemic to recent trade wars, 2020 was an unusual year for all of us including many businesses.

If you recently started a home improvement or home building project, you have more than likely noticed that lumber prices spiked in 2020 and 2021. Subsequently, the coronavirus pandemic has caused the price of many popular building materials to go up, with some seeing their highest levels in years.

According to the Bureau of Labor Statistics, in the April 2021 report over half of the April rise in the index for processed goods for intermediate demand can be traced to an 18.4 percent jump in prices for steel mill products. The indexes for industrial chemicals, plastic resins and materials, meats, plastic products, and lumber also moved higher. That all translates into a bigger price tag for a variety of home improvement projects. 

Recent findings from the National Association of Home Builders (NAHB) confirmed that household construction costs have surged over the past year. This rise in construction costs is directly tied to soaring building material expenses—namely, the price of lumber. According to the NAHB, current lumber costs are up 340% from 2020. What’s more, lumber prices have already risen by an additional 67% since the beginning of 2021.

There are several reasons for these higher expenses. Specifically, both the COVID-19 pandemic and the presence of historically low-interest rates have contributed to a rise in home purchases and renovation projects—thus elevating the demand for building materials.

Mills closed in the spring due to stay-at-home and social distancing measures enacted by state and local governments. When prices fell between March and April 2020 as a result of the COVID-19 pandemic, mills projected that housing would be adversely affected and therefore anticipated a large drop in demand. Accordingly, mills that remained operational substantially decreased capacity utilization.

According to the NAHB, producers did not anticipate the massive uptick in demand from do-it-yourselfers (DIY) and big-box retailers during the pandemic. Housing weathered the storm much better than most anticipated. But the DIY demand from couped-up homeowners far exceeded expectations, as states reopen and construction demand then far surpassed lumber mills’ projections.

Also contributing to the equations there was a total of 63 catastrophic loss events that occurred in 2020, including tornadoes in the Midwest, wildfires in the West, and hurricanes in the Southeast. The demand for building materials and labor created by these catastrophic loss events, combined with reduced capacity due to COVID-19, have resulted in significant cost estimation increases.

The combination of all these factors has caused an upending of the usual supply/demand equilibrium. Nevertheless, this increase in demand has been met with supply shortages throughout the construction industry. In the midst of greater demand and lower supply, building material prices have subsequently soared.  

As a result, 47 percent of homebuilders surveyed by the NAHB say they’re incorporating price escalation clauses in sales and construction contracts to help cope with skyrocketing lumber costs. The National Association of Home Builders says lumber price increases have added $36,000 to the average price of a new home since April 2020.

Unfortunately, this surge in costs could pose coverage consequences for homeowners and businesses across the country. These rising costs on lumber and other building materials are affecting homeowners and commercial insurance premiums because reconstruction costs are a factor in your insurance premiums, and most homeowners and business owner will notice some increases in your annual premiums. 

As a result, many could discover that their existing policy limits and coverages no longer offer adequate protection—leaving them financially vulnerable in the event of a loss.

Further, insurance carriers may increase policyholders’ premium costs to account for the risk of elevated claim expenses. Understanding how lumber price increase is impacting industry-wide insurance-to-value calculations in new and renewal policies is essential because proper valuation is extremely critical to ensure there is appropriate coverage in the event of a loss.

Considering these ongoing cost concerns, homeowners like you need to respond accordingly. As such, consider taking the following measures: 

According to an article in www.propertycasualty360.com titled “Unraveling the Mystery of the Miami Building Collapse,” the chain of litigation works like a tree. The renter/survivor will sue the landlord or the unit owner. The unit owner will sue the association. The association will sue its property management firm. Everyone will sue the original architects, contractor, and any sub-contractor that ever even walked the halls. They’ll sue neighboring contractors, the municipality, and its vendors for faulty inspection or failure to give notice, or failure to take action of any particular type. They’ll sue consulting engineers who may have been called in over the past 40 years.

Considering these ongoing cost concerns, homeowners like you need to respond accordingly. As such, consider taking the following measures: 

• Review your policy. Be sure you fully understand your homeowner’s insurance policy. Take note of whether you have replacement cost coverage (which can offer compensation for the cost of replacing or rebuilding your home as new) or actual cash value coverage (which can offer compensation for the depreciated value of your home). Ensure your policy provides a correct replacement cost or overall value for your home.

• Consider coverage adjustments. Consult a trusted insurance professional to help you determine whether you need to adjust your policy to have sufficient coverage in the event of a loss. This may entail changing your policy’s valuation method, increasing your current limits, obtaining specialized coverage or implementing a policy endorsement. 

• Communicate with your insurance carrier. Lastly, make sure to inform your homeowners’ insurance carrier whenever you conduct renovations or implement other improvements in your home (e.g., adding a new deck or remodeling the bathroom). Update your policy as needed.

If you were thinking of saying “the heck with it” and opting to retire and sell your home and replacing it with an RV to take advantage of the price increases of your home, and to avoid the increases in homeowners insurance, think again. Since February 2020, before the pandemic began, wholesale towable travel trailers’ prices rose 54 percent. Motorhome wholesale prices rose 47 percent in the same period. You are simply “blank” out of luck.

This article was written by Keven Moore. 

 

Keven has a bachelor’s degree from the University of Kentucky, a master’s from Eastern Kentucky University and 25-plus years of experience in the safety and insurance profession. He is also an expert witness. He lives in Lexington with his family and works out of both Lexington and Northern Kentucky.