Consider “Demand Surge” (Local Rise in Building Costs) When Insuring Against Disaster

Your homeowners' insurance may not be adequate if many houses in the area sustain major damage.

Studies over the years consistently show that American homeowners are underinsured—that is, they don’t purchase enough insurance coverage for their homes to rebuild after a major loss or disaster. With all the disasters that have occurred lately, such as wildfires in California and flooding in the Carolinas, considering the prospect of losing one’s home to disaster should take a step up on every homeowner’s priority list.

As described in Nolo’s books and articles such as Homeowners' Insurance: Got Enough Coverage? the usual homeowners insurance policy provides “replacement cost coverage.” That means that if your house is destroyed, the amount you receive to rebuild with will be preset, based on information about the house you provided when you first got the policy.

However, as the October 1, 2015 issue of Bottomline Personal (“5 Myths About Homeowner’s Insurance," by J. Robert Hunter), reminds us, “because of a phenomenon called ‘demand surge,’ that might not be sufficient if your home is destroyed in a major disaster. When many homes in an area require repairs, the cost of building supplies and labor tend to skyrocket—sometimes by more than 50%.”

What’s the solution? First, if you’re buying a home, renewing your policy, or have a minute to review your current policy, make sure you’ve adequately represented your home’s features to your insurance company. Resist the temptation to make the house sound small and cheap in order to keep your premiums down, and tell your carrier if you’ve made any major improvements (i.e. added a room).

Then, talk to your insurance provider about the demand-surge issue. See whether it provides a “demand surge rider” to deal with this prospect. If not, see whether you can amend your policy or purchase some other form of add-on coverage to increase your possible payout.