Coverage, claims, construction and cookies

Breaking news: stuff is getting more expensive! With home values and construction costs through the roof, the nuances in your home insurance coverage may be more relevant than at any time since the pre-2008 boom.

In North Carolina, the increase in real estate values has been compounded into a property insurance market where insurers were already feeling the heat. In addition to the $24 billion in damages from Hurricane Florence in 2018 (according to the National Hurricane Center), seemingly perennial hail storms in some regions of the state have been driving rate increases by most N.C. insurers for several years now. Roofing contractors have been going door to door in various hot spots for years, looking to find damage and drum up a new job. Personally, the uninvited visitors I prefer are the ambitious scouts with kettle corn or Somoas cookies in hand. Just put me down for two of each … for the kiddo, of course!

Door knockers aside, a rapid change in the value of your largest insurable asset presents unique coverage and cost considerations that aren't as relevant in more modest market cycles. Most people would readily recognize and recite their "replacement cost" coverage on their home policy. If you suffer a loss, your reasonable expectation is that the policy will pay the amount required to replace the damaged portion of the home … or rebuild the whole home in the event of a total loss, but that common coverage language takes multiple shapes, and not all policies will do what you expect in a market like this.

The most common policy type in North Carolina for decades has been an HO3 (aka 'Special Form'). The HO3 includes replacement cost, and it is commonly endorsed to include a 25% increase to the dwelling amount if needed. In other words, if you have a total loss and your policy shows $400,000 for dwelling coverage, you actually have $500,000 available to you for replacing your home.

Most policies also have a 3%-4% inflation guard to make sure the value of your policy keeps pace with the actual cost to rebuild … and the 25% cushion for replacement cost is assumed to be sufficient to pick up the slack IF we were in a typical market cycle. I don't have to tell you that nothing is 'typical' these days. According to data from builderonline.com, build cost per square foot is up from $139 in July 2019 to $190 in July 2021. For the math majors … that's much more than 25% (closer to 37%), and it's likely to be more pronounced in areas with above average home values.

Fortunately, there are policies that can handle this volatility. The HE7 policy is an enhanced policy that is uniquely standardized in North Carolina. These policies are fairly common in areas with higher than average home values, like Mooresville and the other Lake Norman communities, but not everyone who needs an HE7 has one and not all HE7s are the same. There are numerous benefits of the HE7 over the HO3, but the perk that pertains to skyrocketing construction costs is the enhanced or guaranteed replacement cost coverage. It is built to protect homeowners against exactly the situation we are currently in, where the cost increases are outpacing historical expectations.

Since our industry is allergic to simplicity, the HE7 replacement coverage also has a couple of different flavors. The more common version is a 50% increase … so that $400,000 dwelling amount is really up to $600,000 in available coverage. That's a little better, but the less common and best available coverage language is a true 'unconditional' replacement cost guarantee. If you have that endorsement, the limit shown on the policy is essentially meaningless if you have a claim. Whatever the replacement cost is … that's what the policy pays, no matter what limit you've been paying premium for.

Incidentally, you may have noticed that the other limits on your policy (contents, other structures, loss of use) are percentages of the dwelling amount. If the payout for the dwelling exceeds the coverage amount shown on the policy, the coverage available for the other line items are increased automatically by the same percentage. This is important for something like Loss of Use. If you think it's hard to build or buy a house near the lake … try renting one at a reasonable rate while you are rebuilding a damaged home. Without the right coverage in the event of a major claim, you could be stuck in living conditions that are nothing like the home you are used to.

In years past, the HE7 has been marketed as a 'high end' coverage for newer or higher value homes, and it certainly holds true that the more customized your home is, the bigger risk you run of being underinsured on anything but a guaranteed replacement cost policy. However, increased replacement cost coverage is relevant to all homes in this market. Your agent can help you weigh the cost vs benefit of beefing up your HO3 or switching to an HE7, depending on the age and value of your home. In many cases, the HE7 may actually be less expensive than increasing the HO3 limit enough to make sure the coverage is adequate, and the additional protections in the HE7 (which are significant) will be icing on the cake.

Forgive me for adding another item to your to-do list in this twilight zone era we are living in … but the good news is that this is probably one of the easiest problems to solve. The next time you have a chat with your agent, this should definitely be a question you ask … and the next time your doorbell rings, here's hoping it's because someone is offering sweet coconut covered in chocolate and caramel deliciousness … and not because they can see hail marks on your roof!