Lumber Price Spike Means Your Homeowners Clients May Be Underinsured

Lumber prices are, if you'll pardon the pun, going through the roof.

Last Thursday, February 18, the price per 1,000 board feet of lumber on the Chicago Mercantile Exchange hit a record $1,004.90. By the close of trading Friday, it had retreated​ to $997.90, but this was up from $478.30 on October 29. One market watcher speaking to CNBC last week predicted another 30 to 35% increase from current prices. 

A boom in home renovation activity in the wake of state stay-at-home orders during the coronavirus pandemic has boosted demand for lumber and steel, experts report. At the same time, lumber mills expected mass job losses last spring to hurt demand, so they cut production. That coupled with other supply chain disruptions​ has combined to reduce available supplies, resulting in soaring prices.

Iron and steel costs are also rising, up more than 15% in the past year​, according to the Associated Home Builders and Contractors.

What does this mean for you? Some of your homeowners insurance clients may suddenly be underinsured. The replacement cost of their homes has gone up - the average price of a new single-family home has increased $24,000 since last April.

Some insureds may be protected if their insurers have attached one or the other of two ISO endorsements:

• HO 04 11 05 11, Additional Limits of Liability for Coverages A, B, C, and D​, which applies to the limits of insurance for the  Dwelling, Other Structures, Personal Property, and Loss of Use coverages
• HO 04 20 05 11, Specified Additional Amount of Insurance For Coverage A—Dwelling​, which applies only to the limit of insurance for the Dwelling coverage

Both endorsements apply when there is a loss to the dwelling that exceeds the Dwelling insurance limit. They automatically increase the Dwelling limit to equal the current replacement cost of the building. Endorsement HO 04 11 05 11 increases the Other Structures, Personal Property and Loss of Use limits by the same percentage. These limit increases apply under two conditions:

• The insured has allowed the insurer to adjust the Dwelling  limit and premium in accordance with property evaluations the insurer made and increases in inflation; and
• The insured has notified the insurer, within 30 days of completing any improvements, alterations or additions to the insured dwelling which increase the building's replacement cost by 5% or more

Insurers who do not use ISO forms may offer similar endorsements. If you have homeowners insurance clients whose policies do not contain these types of endorsements, you may want to invite them to contact you to discuss possibly  increasing their coverage. Check home values using the cost estimator the insurer on each policy provides. Bear in mind, though, that the carriers themselves might not have updated their cost estimators to reflect these wild price hikes.

 

Commodity prices often fluctuate, but these types of increases are extreme. What goes up may come back down, but for now many people may not have enough insurance to rebuild their homes.

Comments

[Zachary Schneiderman]

With these changes it is important to review the replacement cost estimate of a home and make necessary adjustments. I had to increase the coverage to my home in Southern California recently for these exact reasons.

[GBWhatsApp]

Thanks for sharing, this is awesome. Would love to see more of these.