Rapidly rising home construction costs could result in your home being underinsured if you suffer a major loss and haven’t increased your homeowner’s insurance policy replacement cost limits lately.
Your policy has a maximum amount it will pay to rebuild your home, and that limit should reflect the current construction costs. Otherwise, the policy may not cover a total loss like a fire razing your home. And whatever the insurance doesn’t cover, you would have to pay out of pocket.
Construction costs
According to a report by Verisk, reconstruction costs in the U.S., including materials and retail labor, increased by 5.2% from April 2024 to April 2025, up from April 2023 to April 2024. That’s after rising nearly 40% from 2020 to 2023.
Those increases come on the heels of massive cost increases during the pandemic. Material costs surged in 2020, 2021 and 2022 when supply chains were snarled. Some prices have come down a little, but they are still mostly higher than before the pandemic. For example, according to the construction analytics website edzarenski.com:
- Ready-mix concrete costs have risen 38% from 2020 to 2024.
- Fabricated structural steel costs have risen 47% from 2020 to 2024.
- Lumber and plywood — After rising by a total of 65% 2020 and 2021, prices have fallen about 25%.
- Flat glass costs have jumped 26% from 2020 and 2024.
- Steel piping and tubing has increased 32% between 2020 and 2024.
With tariffs coming on many goods used in home construction, we could be in for another round of construction cost increases.
Also, the construction industry faces a labor shortage, which has added to the cost of rebuilding.
And it’s not just about the money. It also means homeowners may face longer wait times to get repairs completed.
Escalating construction costs can extend rebuilding and repair timelines for properties. Longer waits for materials or workforce can also increase compensation periods, burdening homeowners temporarily relocated with extra living expenses.
Insurance policies typically cover additional living costs, yet if delays surpass those benefits, homeowners are forced to pay for extra accommodation expenses themselves.
Revisit your replacement cost
You have probably noticed that your insurance rates have already been increasing during the last few years. And if you live in an area or state that is exposed to natural catastrophes, you may even find it difficult to secure coverage.
One of the critical parts of the claims settlement process is determining replacement costs, or the amount required to reconstruct or repair buildings to their original state with the availability of new materials and current labor rates.
If the home is completely or mostly destroyed, you’ll want to ensure that those costs are less than your policy limits.
When construction costs rise, the replacement costs, too, climb, thus making it important for insurers to adjust coverage limits so that homeowners are protected sufficiently.
If your replacement cost is not increased, you may become underinsured, which is when the coverage limit on a policy is less than the amount it would cost to completely rebuild or repair the structure.
This can result in a devastating scenario. For example, a homeowner bought insurance five years prior with a coverage cap of $550,000, and initially, this sum was adequate for rebuilding.
Yet, with escalating material and labor expenses, the present reconstruction price has soared to $650,000. Should a total loss occur, the insurance compensation would fall $100,000 short, forcing the occupier to pay the rest out of pocket.
What you can do
The onus is on policyholders to ask us to review their current coverage and make adjustments accordingly before your policy renewal. You should also consider:
Reviewing your policy — Work with us to conduct an annual policy check to ensure that your coverage matches current reconstruction expenses, averting monetary shortfalls.
Opting for a replacement cost policy — Choose a replacement cost value policy over actual cash value policy. The former offers better financial security. Actual cash value policies discount depreciation, usually covering less than the actual construction cost. Replacement cost value policies, despite being slightly costlier, guarantee reconstruction with contemporary materials at prevailing market rates, lessening personal expenses.
Expanding your coverage — Ask us about expanded coverage options like:
- Extended replacement value coverage, which boosts dwelling limits if costs exceed standard coverage.
- Loss of use insurance, which aids in financing temporary housing if the property becomes uninhabitable.
- Ordinance or law insurance, which covers expenses for conforming to current building codes.
