VIRTUAL UNIVERSITY
COVID AND THE COST OF BUILDING MATERIALS Several months ago, I had a new roof put on my house (by the way, I paid for the new roof and did not make an insurance claim) and was shocked by the cost estimates. The roofer explained that the cost of shingles had increased substantially over the last year due to production interruptions caused by the Covid response. Just this week I was informed that the price of lumber has also tripled over the past year. Hopefully, this is a short-term situation, but it does raise a concern regarding the cost of construction compared to the property limits provided by a given f insurance policy. Granted, not all property losses are total losses, however significant increases in construction material could affect a large property loss, possibly exhausting the available amounts of coverage. What coverage options are available to mitigate a situation of rapidly increasing construction costs? Homeowners’ Within the homeowners’ program, two options are available: • Attach the Inflation Guard Endorsement; and/or • Attach one of the two “Additional Limits” endorsements. Inflation Guard (HO 04 46) The inflation guard endorsement increases the initial policy limit on a pro rata basis throughout the policy period. Unfortunately, choosing an inflation percentage is a lagging indicator and is a guesstimate that may not predict the increases from an event like a pandemic interrupting the material supply chain. Depending on the inflation guard percentage chosen, the
additional premium for inflation guard protection can range from a 2 percent increase to about 6 percent. “Additional Limits” Endorsements Two “additional limits” endorsements are available; both allow the insured to purchase an additional amount of coverage AFTER a loss occurs. The two available endorsement are: • Additional Limits of Liability for Coverages A, B, C and D (HO 04 11). This endorsement allows the policyholder to purchase the necessary amount of additional limit for Coverage A to equal the property’s replacement costs after the loss. Increasing Coverage A automatically increases Coverages B, C and D when this endorsement is attached; or • Specified Additional Amount of Insurance for Coverage A (HO 04 20). This endorsement allows the policyholder to buy up to a specified percentage of the Coverage A limit only. If the specified limit is 25% and the policy Limit of Insurance for Coverage A is $300,000 then in the event of inadequate insurance after a loss the policyholder would have the option to buy the necessary additional coverage limit for replacement cost up to $75,000. Two percentage options are available, 25% and 50%, but some carriers may not allow the use of the 50% option. Of the two, the Additional Limits of Liability for Coverages A, B, C and D is the preferred option because it allows the insured to purchase whatever additional amount is necessary and all other coverage limits increase in relation to the new Coverage A limit. However, some homeowners’ insurance carriers will not use the HO 04 11, limiting the insured to only the HO 04 20. One major advantage of both additional limits endorsements is the removal of the insurance-to-value (often referred to as the coinsurance) provision in the homeowners’ policy.
