Coverage Corner

The Big One's Coming: Inflation and Other HO Policy Concerns to Address Now

By Kevin C. Amrhein, CIC, CBIA

By the time you read this article, it’s officially hurricane season in America.

Keeping with tradition, in the months leading up to the season’s “formal” launch on June 1, consumers were inundated with the usual public service announcements from local governments regarding storm preparation. Checklists, phone numbers, web addresses, shopping lists (do you have your batteries yet?), tips, and other info was shared. Hopefully some of it stuck!

Unfortunately, “make sure your insurance policies are in a waterproof container” often represents the extent such resources offer regarding insurance coverage. As an insurance geek asked to write about coverage concerns for storm season, my worst enemy is “word count.” Alas, there simply are too many concerning issues to cover in one article. In this edition, I’ll review three areas of the homeowners’ policy that if overlooked, especially this time of year, could easily result in underinsurance.

INFLATION GUARD

Any American not living in a cave has felt the sting that rapid inflation has caused in virtually every spending category including building materials and labor costs. Repairing/replacing a damaged house today will be more expensive than it was 11 months ago, perhaps exponentially. Has the limit of insurance increased during that time? Is the insured waiting until renewal to increase the limit? For example, the insured’s dwelling limit is $300,000. The renewal is slated for $330,000, and the insured seems confident that this increase will hedge against rising costs. However, with no Inflation Guard endorsement or mechanism embedded in the policy, what happens when the loss occurs prior to the renewal?

Agents should review every homeowners’ policy to identify those which may not currently include a mechanism to hedge against inflation such as the ISO’s HO 04 06 Inflation Guard endorsement. Assuming the carrier offers this or a similar option, there’s never been a better time to review it with each insured, emphasizing that the endorsement applies the increase on a pro-rata basis.

ADDITIONAL LIVING EXPENSE (ALE)

We know being short on money is problematic. What about time? In addition to increased construction costs, ongoing supply and labor shortages are making jobs take longer. Here we go again: repairing/ replacing a damaged house today will take longer than it would have 11 months ago, perhaps exponentially. When discussing policy tools which address the adequacy of limits (e.g. Inflation Guard), agents also should stress the likelihood that displacement due to a loss will require a longer timeframe.

ORDINANCE OR LAW

To a limited degree, many homeowners’ policies address increased expenses regarding code compliance. In the spirit of our discussion regarding increased costs, consider the effect on code compliance. Specifically, what if code requires that a firedamaged house be torn down and rebuilt? Of if code requires that the repaired home be retrofitted with an upgraded plumbing or electrical system? Agents should review every homeowners’ policy to identify those which currently offer minimal coverage for these expenses and discuss a mechanism such as ISO’s HO 04 77 Ordinance or Law Increased Amount Of Coverage endorsement to increase it.

TAKEAWAYS FOR THE AGENT

▲ Storm season is the perfect excuse to revisit with homeowners’ insureds any limitations in their policy.

▲ Inflation is higher in recent months than any time in the last four decades. It’s fair to say that a tool such as an automatic Inflation Guard endorsement has never been more valuable in the duration of your insured’s homeownership or your career as an agent than right now.

▲ Remind insureds that much of the coverage flows from the Dwelling limit. For example, using the HO 04 06 will not only increase the limit available for Coverage A but by default would increase limits available for Coverages B, C and D. That’s all for now. Until the next round … cheers!

Kevin C Amrhein, CIC, CBIA is IA&B's education consultant. He works with our CISR and CIC programs, as well as our special topic seminars and live webinars. Catch him at one of our upcoming professional training offerings: IABforME.com/education