Costs for Renewal after Catastrophe
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. And if those inflated prices exhaust the limits of home insurance coverage you have on your property, you could end up footing some of the bill.
Craig Thompson, president of Herbert Thompson Insurance Agency Inc. in Franklin, La., and former president of the Independent Insurance Agents and Brokers of Louisiana, says that prices for labor and materials following a major catastrophe like hurricanes Katrina or Rita can increase prices anywhere from 20 to 50 percent.
Those numbers are echoed by Risk Management Services (RMS), a leading provider of expertise on the management of catastrophe risk. Auguste Boissonnade, vice president of model development for RMS’s weather risk team, says that average construction labor costs in Louisiana after Katrina increased by roughly 15 percent.
“However, this increase jumps to 35 percent plus when considering coastal counties such as Orleans county,” he says. “If we only consider changes in wages from quarter to quarter, then we saw increases between 20 and 50 percent.”
Based on RMS’s analysis, the overall average increases for both labor and materials were closer to 20 percent than 50 percent, he says, adding that these numbers are mean estimates only.
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. As long as claims for damages don’t reach horrific amounts, that irritant impacts only your insurance company. But it can easily trickle down to you if increased building costs cause you to exceed your policy limit.
Rebuilding costs for labor and materials can increase anywhere from 20 to 50 percent following a major catastrophe.
“That could happen in these types of cases and in any case of a total loss,” says Madelyn Flannagan, vice president of 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 $200,000 homeowners insurance policy that covers wind and hail damage. If a hurricane blows through your neighborhood and your home suffers a near 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.
Especially if you live in a coastal area such as Louisiana, Texas and Florida, it’s a good idea to talk to your insurance agent about having adequate coverage. If you’re worried about increased construction costs following a catastrophe, inquire about purchasing an “extended replacement cost” rider. This rider is designed to provide additional insurance coverage (of 20 percent or more over the limits of your policy) to pay for increasing construction costs. This can be critical if there is a widespread disaster that pushes up the cost of building materials and labor.
“Not all companies offer it, but it’s something you need to talk to your agent about,” Flannagan says.
Jeff McCollum, spokesperson for State Farm, says that some insurance companies offer built-in protection in their standard home insurance policies. State Farm, for example, has a 20 percent buffer included in its policy on top of the replacement costs (called Option I.D.). For example, if your home is insured for $100,000 and a catastrophe wipes out your home, State Farm will pay up $120,000 to rebuild it, says McCollum. But State Farm doesn’t offer Option I.D. in every state. “Different states have different rules about these things,” he says.
Extra costs could come out of your own pocket
To keep costs down, insurers try to strike up a deal with vendors and contractors. “If we find contractors who are willing to keep their costs in line, in exchange for that, we’ll recommend them to policyholders,” he says.
Also, 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.
April 1, 2010 10:17 am 
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