Is Your MA Property Insured to Value? (How Inflation is Affecting your Home or Business Value)

Whether you own a home, a business property, or both, it’s important to make sure it is properly covered from all risk exposures.

But what if we told you that due to the current economic climate, it might not be?

A hot topic in the insurance industry right now is that many properties here in Massachusetts, and across the country are undervalued on their insurance, and therefore underinsured. In fact, a recent article from GenRe reported that 60% of homes and 70% of commercial properties are undervalued.

Could it be the case for you? It very well could be.

At Berry Insurance, we’ve been following this trend, because we want to make sure none of our clients become stuck with an uncovered claim.

So in this article, we’ll go over what goes into property values and why so many properties are undervalued right now so you can begin to find out if your property insurance (homeowners insurance, or commercial property insurance) is still adequately covering you. 

How are insurance property values determined?

Before we get into whether your property may be undervalued, it’s important to understand how insurance companies determine the value of your property in the first place.

The dwelling portion of your homeowners insurance or commercial property coverage protects the actual structure of your property and any attached structures like garages, decks/porches, and signage.

That being said, many people are confused when their dwelling insurance limits are different from what they paid for their home or building. It’s understandable -- if you paid a certain amount for your home or building, you would expect that to be the value listed on your insurance, right?

Well that’s not exactly how it works. The property value on your insurance is actually based on the replacement cost of the building, not market value.

Here’s the difference between the two:

Market value vs. replacement cost

Market Value: 

Market value is the value of your property if it were sold today. This includes multiple variables, such as depreciation, land value, location, and the current state of the real estate market.

Replacement Cost: 

Replacement cost is what it would cost to rebuild your property if the structure were to be completely destroyed/burned down, etc., regardless of where it is located.

For example: imagine a three bedroom, two bathroom, 2,000 square foot home. If it was built on a small piece of land in Uxbridge, MA, it might sell for around $300,000. If the same exact house was built at the same time on a large piece of land in Wellesley, MA, it might sell for $800,000. 

Even though there is over a $500,000 difference in the market value of the two homes (because of land and location), the replacement value of the two homes are exactly the same, because they cost the same amount to build. 

If your limit was instead based on market value your home could be under- or over-insured. If under-insured, you might not be completely covered during a claim. If over-insured, you would be paying for more insurance than you need.

How replacement value is determined

To determine your dwelling coverage limits, agents use a cost estimator tool, evaluating factors such as square footage, number of rooms, HVAC systems, materials, roof style, fireplaces and wood stoves, garages, decks and more as well as zip code to determine cost of labor and materials to determine an estimate of your total home value.

Once the limits have been set and the policy has been established, your policy will be reviewed each year and typically increased 3-4% due to inflation of materials and labor costs.

Why are so many properties underinsured?

So we just went over that you can expect your home insurance premium to increase 3-4% each year due to inflation of materials and labor cost.

Well, this is basically the reason so many properties are underinsured right now. Because current inflation, specifically of building materials in the last year has skyrocketed. 

According to the GenRe article referenced in the intro, in the past year:

• Lumber costs are up 50% - 100%
• Labor costs are up 8%
• Crude oil, a major component of paint, roof shingles and flooring, is up 80% from October 2020
• Prices for granite, insulation, concrete blocks and brick are at record levels
• Costs are up $9,000 per unit for apartment construction
• Costs for PVC production/availability are rising due to recent hurricanes

Because of this, building or repairing a home or business costs a lot more now than it did a year or even a few months ago. This also means building or repairing your home or business costs a lot more today than it did since your last policy renewal when your replacement cost was determined.

What these rising property values will mean for you

Since property values are rising, if your property insurance isn’t up to date and you are under-insured, it might mean a few things for you.

You could have an out-of-pocket claim expense

If you are under-insured, you could have gaps in coverage and end up with a partially uncovered claim.

Let’s say for example a fire destroys your property. You have $500,000 of property insurance limits, but it is not up to date and taking into account current inflation. You rebuild, and it costs $600,000. That’s $100,000 (plus your deductible) not covered by insurance that you would need to pay out of pocket.

Also, commercial insurance has a coinsurance penalty which could eliminate even more of your claim payout if your property isn’t insured to a certain percentage of its value. To learn more, read this article: How Does Coinsurance for Commercial Property Insurance Work?

Your agent may recommend you increase property limits

To adjust for current inflation, your insurance agent may suggest you increase your dwelling coverage limits.

This could happen during your next renewal, or sooner if your agent is being proactive about this issue.

If you’re concerned your limits aren’t high enough, you may want to reach out to your agent soon rather than wait until renewal.

Your insurance premium could increase

If you increase your insurance limits, you’re also likely to see an increase in your premium cost.

We’ve also recently seen some carriers increasing their inflation guard percentage on both home and commercial property insurance policies, which could happen to you at renewal.

Make sure your insurance is adjusting with the times

We get it - inflation sucks.

But it happens, so you can’t just ignore it. It’s important that you update your insurance to keep up with times. 

But that’s not completely your responsibility! Your insurance agent should help with that. To find out if your home or business is still adequately covered, contact your independent insurance agent today.