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Inflation Ripple Effect: Homeowners Could Be Underinsured, Experts Warn

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Inflation in the U.S. has fallen from 9% to 3% over the past 12 months, with Americans seeing some relief on the cost of things like gas, groceries and airfare, according to the Associated Press. That leaves inflation still “significantly above” the Federal Reserve’s target of 2%, officials said in recent days, and multiple rate hikes may be needed to reach that level, CNN reported last week.

In the meantime, however, experts say inflation’s continued effect on construction costs and other factors could leave homeowners vulnerable to losses that are not completely covered by their insurance policies. In March, one survey found that only 9% of homeowners had looked into adjusting their coverage for inflation, Property Casualty 360 reported.

Inflation, along with supply chain issues and labor shortages, may affect how much coverage is required to rebuild or replace a homeowner’s valuables. Between December 2019 through December 2021, costs for construction materials increased by 44%. According to findings from a recent survey by The Harris Poll, less than half of insured homeowners who completed home renovations during the pandemic adjusted their insurance to account for rising building costs.

“We are finding that more homeowners are underinsured,” said Brandon​​​​ McCarty, Regional Practice Group Leader, Burns & Wilcox, Philadelphia, Pennsylvania. “The labor rate is more expensive, gas prices are up, and then you add in the cost of installation. Repairs for a house fire could cost triple what it did previously because everything across the board is so expensive.”

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We are finding that more homeowners are underinsured…Repairs for a house fire could cost triple what it did previously because everything across the board is so expensive.

While Homeowners Insurance and Personal Articles Floater policies could include annual inflation adjustments, these may not be sufficient and do not replace a thorough review with an insurance broker, said Heather​​​​ Posner, Associate Vice President, National Product Leader, Private Client, Burns & Wilcox, Cleveland, Ohio.

“You always want to make sure that you are properly insured,” she said. “Whether it is jewelry or art or the cost of rebuilding your home, the first thing that individuals need to understand is that they need to be properly insured. The problem is the cost to rebuild or replace something does not stay the same, it is not stagnant, the cost changes based on factors in the economy, including inflation and market costs or trends. If insureds are not having their assets reevaluated by experts that know the cost to rebuild or replace their assets, then there is a good chance they could be vastly underinsured.”

Insuring high-value items against theft

While being underinsured on a Homeowners Insurance policy can have the most severe impact in the event of a total loss due to fire, severe weather, or other hazards — leaving residents without enough coverage to properly rebuild their homes — it is also a concern for high-value collections. These items can be protected with a Personal Articles Floater, which is a standalone policy that covers items such as jewelry or art that exceed standard Homeowners Insurance limits. According to a recent report from Barron’s, the value of luxury collectibles like watches, diamonds and handbags increased 7% over the past year.

“With art and jewelry, it is not necessarily inflation that usually drives individuals to be improperly insured, but it can be,” Posner said. “There are policies out there that will put an inflation factor on a piece of jewelry, for example, but a lot of times that does not keep up with the market. Even if an insurance company is adding inflation to the initial insured value, it is very likely that you could still be underinsured, depending on the piece. This is where expert jewelry and art appraisals become important.”

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Even if an insurance company is adding inflation to the initial insured value [of a piece of jewelry], it is very likely that you could still be underinsured, depending on the piece.

In July, more than $1 million was stolen from the Hollywood Hills, California, home of Tina Knowles-Lawson, the mother of superstar Beyoncé Knowles. The burglars removed a safe that held cash and jewels, reportedly targeting the 69-year-old woman’s house when she was out of town, the Los Angeles Times reported on July 10. Police are still investigating how the theft, which was discovered by someone stopping by the home, had occurred, Fox 11 Los Angeles reported.

Last March, Fox News reported on an increase in home burglaries in the Los Angeles area, including armed intrusions at the homes of celebrities like reality stars Dorit Kemsley and Christine Quinn. Anyone could be targeted, however, McCarty said — especially in a more affluent neighborhood.

“I don’t think it has to do with celebrities anymore — it’s the more affluent areas that are being targeted,” McCarty said.

In July, three men were arrested on charges related to a series of burglaries at luxury homes, often on dead-end streets, NBC New York reported July 20. In March, CTV News Vancouver reported on a series of thefts at luxury homes that were under construction; police reportedly found hundreds of thousands of dollars worth of stolen goods being stored in shipping containers. According to Posner, “wherever there is money or items to be had, that is a focus for anyone who is going to burglarize.”

“Homeowners often believe they are not at risk because they ‘live in a nice neighborhood,’ but that is why criminals are targeting them,” she said. “Their lifestyle can also create opportunities for burglaries. For example, if they don’t have correct security measures in place but they have a lot of people, such as domestic employees or maintenance people coming in and out of their home, they may have an increased exposure for theft. Insureds also need to be careful of what information about their life, assets, and whereabouts can be gathered online or through social media posts. If insureds do not think about the information we are giving others, it can create opportunities.”

To ensure their valuables are properly covered by their Homeowners Insurance or Personal Articles Floater, homeowners should review their policies and limits with their insurance broker regularly. “In a burglary, the Homeowners Insurance would likely need to come into play because of damage done to the house,” Posner said, whereas the Personal Articles Floater, which would not usually have a deductible, could cover the high-value items stolen. “It is very important to understand the terms and conditions of the policy that is in place for you.”

The importance of adjusting policies for inflation

As supply chain issues, labor shortages and rising materials costs continue to affect the amount of Homeowners Insurance individuals need to adequately protect their homes, greater awareness may be needed among property owners. Last June, a woman in Phoenix, Arizona, told CBS 5 that she spent $25,000 out of pocket to rebuild her home after a fire because she was underinsured on her policy.

“I’m not sure whether homeowners are in denial or simply unaware of just how bad the situation is,” McCarty said. “They might not believe that their house would cost that much to be replaced or that they need that level of coverage. However, the cost of getting a project done is currently astronomically higher due to inflation.”

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I do not know if homeowners are in denial or just unaware of just how bad it is. They may not believe their house is worth that much or that they need that much coverage, but the cost to get a project done is astronomically higher currently because of the inflation.

Last summer, PolicyGenius reported that higher construction costs, labor shortages and the rising threat of severe weather events made homeowners more likely to be underinsured on their policies. In November of last year, a survey found that 60% of home and auto policyholders were worried about being underinsured, Fox Business reported.

“It is important to ask questions. If you do not know what something means on your policy, ask your broker to explain it,” McCarty advised. “Do your homework on your retail insurance broker — make sure it is someone in the community who is trusted — and do not be afraid to shop and compare coverages. Also understand that the cheapest is not going to be the best when you are pricing Homeowners Insurance.”

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What happens a lot is that renewals will come out automatically and they may include a small inflation on the home that might not keep up with the market inflation. … Really working with a broker to verify that your home is insured properly is what needs to happen.

The insurance broker is a key resource in this situation, Posner added. “They can talk about what proper insurance looks like, whether it is for their home, their art or their jewelry, based on inflation factors that may be happening in the market or based on market trends,” she said. “What happens a lot is that renewals will come out automatically and they may include a small inflation on the home that might not keep up with the market inflation or the cost to rebuild. It is more common for homeowners to renew their policy without having a conversation. Really working with a broker to verify that your home is insured at the correct rebuild value is what needs to happen.”

It is all the more important, she added, amid the ongoing rise in both the frequency and severity of major weather events. “Homeowners who can secure the full limits should make sure they are doing that,” she said. “It is all about working with the right experts.”

Personal risk management remains essential 

In addition to working closely with an insurance broker to review policy limits on Homeowners Insurance and any Personal Articles Floaters a homeowner may have, insurance professionals can also assist in advising property owners about risk management strategies to help prevent losses, Posner and McCarty said. For example, security measures like doorbell cameras and security systems could help homeowners avoid costly claims. In Pine Belt, Mississippi, police recently told WDAM 7 News that Ring doorbell cameras and similar tech could help deter criminals.

“Smart home technology is becoming more reliable and more affordable,” McCarty said. “The move to smart home technology may not get you a discount like the larger home security systems will, but it can be a deterrent. Homeowners should utilize professionals and experts to ensure they have the correct risk management strategies in place, along with having their home and collectibles insured to the proper value in today’s market.”

As homeowners assess their potential vulnerabilities, they should also consider household behaviors that could place them at greater risk — such as a celebrity or individual with a more public profile who posts regularly on social media about their daily activities, Posner said. “Homeowners do not think like criminals or risk managers; they are not trained to think about what might cause an insurance claim or make them vulnerable,” she said. “There are experts you can bring in for this type of evaluation and they can customize plans and insurance programs for you. That can help make sure you and your family are the safest you can be, and your valuables are the safest they can be.”

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