Rising construction costs will push the price of rebuilding after Colorado’s most destructive wildfire beyond some homeowners’ insurance coverage, construction, industry and insurance officials say. of the government.
Losses are expected to top $1 billion in last week’s Marshall Fire, which swept through the suburbs between Denver and Boulder, Colorado.
The majority of homeowners in burned neighborhoods are considered by insurers to have sufficient coverage for most rebuilding costs. This contrasts with rural areas of Kentucky hit by tornadoes last month, where some working-class homeowners had little or no insurance.
In both places, labor shortages and the scale of the damage will make rebuilding more difficult, said Erin Collins, senior vice president of the National Association of Mutual Insurance Cos., a trade group. “There are people in the two affected areas who are uninsured or do not have adequate cover in place to compensate for their losses,” she said.
According to surveys by United Policyholders, a national nonprofit consumer advocacy group based in California, about two-thirds of fire victims are typically underinsured. A survey of those affected by the 2020 wildfires in Colorado’s Grand and Larimer counties found shortages often amounting to hundreds of thousands of dollars.
A major cause is the difficulty for homeowners to determine the level of coverage they need, said Daniel Schwarcz, a professor at the University of Minnesota Law School who has studied homeowners insurance. Part of the problem is that consumers have a wide choice, and many are opting for cheaper policies to maintain their annual premiums.
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For buyers, “there is incredibly limited transparency” in determining what a limit should be, he said. Many consumers assume that an agent or insurer has a financial incentive to sell them more coverage than they need, he said. But some agents offer cheaper policies because they don’t want to lose a sale to a rival.
In some disaster-prone areas, insurers are trying to limit their potential losses, said Amy Bach, executive director of United Policyholders. “We know of many situations where consumers ask for higher limits and are denied,” she said.
Last week’s blaze was the most destructive wildfire in Colorado history in terms of the number of structures destroyed, according to disaster modeling firm Karen Clark & Co. Its $1 billion estimate of insured damage includes homes in the Louisville and Superior areas and unincorporated Boulder County. as well as a large commercial area with a destroyed mall and hotel.
Colorado Insurance Commissioner Michael Conway said “there will likely be a problem of underinsurance,” resulting both from inadequate coverage amounts to begin with and from continued inflation. That said, over the next couple of years as construction kicks off, “there will be so many things changing in terms of inflation, construction costs, labor costs that when we get to the point where we will rebuild these houses, the world will probably look very different.”
He noted that the Federal Emergency Management Agency provides financial assistance for underinsurance, though the agency generally won’t act on a consumer’s request until a carrier has reimbursed. all of his payments.
Insurers acknowledge that their policy proceeds won’t always be enough to cover the damage, but they say their agents have worked hard in recent years, in the face of other high-profile disasters, to promote the purchase of policies with more generous terms.
Like many cities across the country, the Denver-area housing market has been scorching for the past year. Low mortgage rates led to strong demand for home purchases that far outstripped the number of properties for sale, pushing up house prices.
Builders increased activity in response, with housing starts in the Denver metro area up 30% in the third quarter from a year earlier, according to housing market research firm Zonda. But they have been slowed by labor shortages and supply chain issues. Nationally, the cost of home building materials rose 21% in November from a year earlier, while wages in home construction rose 8.1% in October from a year earlier. year, according to an analysis of government data from the National Association of Home Builders.
Boulder County is the toughest and most expensive area to build new homes in the Denver metro area, due to limited land supply and higher regulatory costs, said council manager John Covert. at Zonda. As homes in the city of Boulder have become more expensive, demand has increased in nearby suburbs, including Louisville and Superior, he said.
Construction costs in today’s market are particularly volatile due to supply chain disruptions, said David Sinkey, general manager of Boulder Creek Neighborhoods, a Louisville-based builder.
“Cost predictability is next to impossible right now,” he said. “I think what a lot of people are starting to realize is that the insurance coverage will be way below the current cost of construction.”
Underinsurance can lead to delays in rebuilding, and some people whose homes were destroyed in the 2020 Boulder-area wildfires have yet to rebuild. “My wounds were reopened last Thursday, and I relived every moment of the trauma” of the fire that tore through his Boulder home in October 2020, said Kevin Mott, a dermatologist who currently lives at a campsite. -because.
His insurance defaulted and his reconstruction was delayed while he lined up financing. It had a limit of $900,000 for the accommodation itself, plus $700,000 for the contents. His new home will cost around $2 million, including upgrades to meet new local building regulations, he said.
With the exception of insurers selling to wealthy homeowners, most carriers have eliminated once-common and relatively generous warranties to pay the full cost of rebuilding. Instead, in the event of a shortfall, some policies offer to pay a fixed amount, such as 20%, above the insured value of a dwelling.
Many insurers, including State Farm and USAA, also include some type of inflation protection. But they still rely on landlords to update their policies to account for renovations or expansion.
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