How Does High Inflation Affect Your Insurance

How Does High Inflation Affect Your Insurance

June 15, 2022

Would you believe me if I told you that a small kitchen fire can cost over $100,000 to fix? It's more accurate than you'd think especially with the current inflation rates and supply shortages. I don’t know about you, but my kitchen doesn’t take up half of my home and yet that’s half of my market value.

Every day, we get calls with the same questions: "Why are my rates going up?" and "Why is my home insured for double what it's worth?". These are good questions. Even though home insurance covers disasters like tornadoes, fire, and lightning damage, you should be concerned about being required to pay out of pocket for some or all the repairs. The big question should be “Do I have enough insurance on my home?”. At Anderson/Miller, we offer a personalized experience. We want to make sure that if you have a car accident or your house burns to the ground, you'll have enough insurance protection. So, let’s look at how inflation is affecting home and auto insurance policies and what you can do to be sure you have enough coverage without breaking the bank.

First, you need enough coverage on your home to completely rebuild it or make the necessary repairs to make it look like it did before the horrible catastrophe you just endured. The insurance jargon for this process is "indemnification". How do we know how much coverage you need on your home? Your home is unique and so your policy should be too. We don’t just write up a policy for how much you paid for your house. We use software provided by insurance companies to calculate the cost to rebuild your home and remove the debris (whatever was left standing) including the temporary board-up. This number won't have anything to do with the market value of your home since we're calculating the full cost of brand new everything. Even if your home was purchased as "new construction", our coverage is going to be based on reconstruction or "Replacement Cost". Let me put this into perspective...if you have a 2000 square foot home and it's worth $200,000 in market value the replacement cost would be around $415,000. Now, let's say you have a kitchen fire and need to have just the kitchen rebuilt. You could be looking at a $45,000 cost to remove smoke and soot from the contents of your home (clothes, furniture, carpets, walls), another $15,000 to clean up the water damage and dismantling from the fire department, $10,000 for the cost to stay in a furnished apartment while your house is being cleaned up and the kitchen is being rebuilt (if it only takes 5 months), and then the actual cost of a new kitchen of around $30,000. The total bill could easily be over $100,000. A kitchen is typically less than 15% of the square footage of your home and the reconstruction cost is already half of your home's worth. That’s why the Dwelling Coverage limit is based on replacement cost and not market value. Now imagine a large house fire!

Here's how inflation is affecting your home policy: everything costs more and is taking longer. The building materials are more expensive than ever if you can even locate them in-stock. Having to wait on back-ordered items is keeping homeowners out of their home longer. Then, there's the shortage of workers, so the contractors must pay more in wages to get help! All of this is taken into consideration when your home insurance is renewed. You'll see an increase in your Dwelling Coverage limit and if the companies must pay more in claims, we will all pay more for our insurance. They're a business not a charity after all.

So, what can you do to help? Try to make sure you're not turning in small claims that cause even larger rate increases. Clean out your gutters and dryer vent, change your furnace filter, check the caulk around your chimney and flashings, test your sump pump, perform routine maintenance on your furnace and roof, check the hoses on your washer and ice maker, move the grill away from the siding. If you still have galvanized plumbing or a 25-year-old roof, please put that in the budget to replace ASAP! These things will help prevent claims. Increasing your deductible can quickly reduce your premium by lowering your rate and keeping you from the temptation of turning in claims that are not catastrophic.

What about auto insurance? "My car is getting older and yet my auto insurance is going up, that makes no sense!"  It's an easy explanation. The cost to fix it didn't go down, it went up! The labor charges, supply shortages, and increased values on used cars have affected auto insurance claims. If you have had the bad luck of a recent auto accident, then you know that you can even exhaust the rental coverage limit because of the long wait to get your car back. We highly recommend waiting until all the parts are in before you drop the car off for repairs. If your car isn't drivable, then you may end up paying more than your deductible for that claim. Also, I suggest increasing your rental limits now before a loss occurs so that you will have more coverage available if you need it.

How can you reduce your auto insurance rate without cutting your coverage? Slow down. Reducing your speed reduces your chances of being in an accident, having to pay for a ticket, and can help you save money at the gas pump. Sign up for driver tracking! All the companies we represent offer some sort of a tracking app or device so that you can prove to them that you are a phenomenal driver and deserve better rates. We have several customers earning a 35% discount because they really are a safe driver. What kind of driver is a "safe" driver? It's someone who doesn't brake hard, get up to speed quickly, drive after 11pm, primarily drive in the city, or talk/text while driving. If that's you, give us a call to sign up!

I hope this gives you a little better understanding about why inflation is affecting your insurance rates and maybe a trick or two that can save you some money. 

Stay safe!

Kathy White