Expect to pay more for homeowners insurance. Here’s why.
Most insurance policies provide enough insurance coverage to replace a destroyed property, an amount that gets adjusted every year to account for inflation. And it’s the replacement cost that is now driving up the cost of premiums.
The owner of the Plymouth home, who asked to not be identified, was hit with an increase in “replacement cost” even larger than his premium increase: 61 percent.
Another homeowner who shared her policy with me had an 8.6 percent increase in her premium (up $161) based in part on a 5 percent increase in replacement cost (up $30,000).
Some owners of homes and condos don’t bother reading their policies. And no wonder. They are not exactly consumer-friendly. The policies I reviewed do not highlight the percentage increases in premiums or in “limit of liability,” which is the term insurers use for replacement cost. (It is also sometimes referred to as your “coverage limit.”)
Here are some things you should know:
Q. Is everyone’s home insurance going up?
A. I don’t know for sure, but I certainly think so. The state Division of Insurance does not post rate increases online, but it did furnish me with the rate increases of half a dozen of the largest property insurers in the state, after I filed requests for them under the state public records law.
Those insurers boosted their rates by an average 2.65 percent. But that is only one factor in calculating premiums. Replacement cost is the other one. Your premium is determined by multiplying your insurer’s rate by your property’s estimated replacement cost. A rate increase, plus an increase in replacement cost, is a double whammy. Most policyholders are experiencing it when their policies become due for renewal.
Q. What are specific rate increases DOI has provided?
A. The largest rate increase I found in my limited DOI data was Liberty Mutual, an average of 5 percent, with a maximum increase of 6.8 percent.
A spokesperson for Liberty Mutual attributed the increase to “significant inflationary pressures on labor and construction costs, and supply chain constraints that limit materials selection and increase repair/building times.”
The spokesperson said it was the first time since 2014 that Liberty Mutual requested and was approved a rate increase. (The other insurers in the sample most recently received rate increases last year or in 2020.)
After Liberty Mutual, the next largest increase in my sample was Safety Indemnity, an average of 3 percent, with a maximum increase of 11 percent.
Citation Insurance, a MAPFRE company, raised its rate by 2.6 percent, with a maximum increase of 10 percent, while Commerce, another MAPFRE company, raised its rate 2.2 percent, with a maximum increase of 8.6 percent.
MAPFRE is the state’s largest home insurer, with about $355 million in total premiums.
Q. Other large insurers?
A. Safety Insurance raised its rate by 1.9 percent, with a maximum increase of 10 percent. Arbella raised its rate by 1.9 percent, with a maximum increase of 2.2 percent.
Q. How much are replacement cost values going up?
A. I don’t know. And as far as I can see, DOI does not have data on its website showing increases in replacement costs.
Q. Who sets replacement cost values?
A. The insurers do. And they typically rely on companies hired to closely track building material and other costs that affect replacement costs.
The Liberty Mutual spokesperson put it this way: “Customers will likely see additional premium increases due to” replacement values “that automatically increase with inflation.”
Q. Can I challenge the replacement cost value?
A. Yes, you can argue you are being “over insured,” and possibly save a few bucks. But you need to be careful to avoid being “under insured,” meaning the amount you are insured for leaves you short in the event you need to replace your house at today’s prices. The Plymouth policyholder told me he contacted two of his insurer’s competitors for quotes on insuring his house. Both were higher, and he stayed with his longtime insurer.
Q. Where is my replacement cost value listed on my policy?
A. On the “declarations” page, which is usually the first page. There are four categories listed that you want to pay attention to: “Dwelling,” which is your house; “other structures,” such as a detached garage, barn, or shed; “personal property,” which is your furniture and other contents of your home, and “loss of use,” which shows how much you are covered for when living in temporary housing while your damaged or destroyed house is worked on. A dollar amount is listed next to each category.
Your replacement cost value is the amount listed next to “dwelling,” under the heading “limit of liability.” Compare it to your previous year’s amount. The increase you see is the result of inflation.
Q. Are there other reasons my premiums could go up?
A. Check your renewal against last year’s for changes in what’s called “endorsements,” which may add coverage for special categories. One policyholder showed me that her insurer charged her $77 for two special protection plans she didn’t ask for. If you find something you don’t want, tell your agent to delete it.
Also, check for increases in the cost of endorsements. You may consider them excessive. The same policyholder challenged a 24 percent increase in her earthquake coverage.
Q. Anything else?
A. Pay attention to deductible amounts. If your deductible is increased from $500 to $1,000 for wind damage, for example, you are getting less insurance. And you want to make sure you know the difference between “actual cash value” versus “replacement cost.” You have less coverage under an “actual cash value” policy because it includes depreciation. The actual cash value of your 10-year-old roof, for example, is worth a lot less than a new one. Make sure you know what you are paying for.
Got a problem? Send your consumer issue to [email protected]. Follow him on Twitter @spmurphyboston.