The rising cost of housing across the US has become a fixture in market reports, but less attention has been paid to the increasing expenses tied to rebuilding homes after a loss.
The gap between what insurance policies cover and what reconstruction actually costs is growing – and many homeowners may not be aware of how exposed they are.
Mary Roy, senior underwriting team leader with CRC Group, said a number of homeowners are surprised when they learn their policy doesn’t match the cost of rebuilding. “Some homeowners who have suffered damages have also experienced delays in reconstruction,” Roy said. “Others have found that their coverage does not provide full replacement cost.”
She emphasized that brokers and agents who understand the issue are in a better position to help. “Retail insurance agents who understand the full spectrum of challenges can better help their clients find the right coverage to fit their needs and budget,” she said.
Reconstruction costs are rising alongside home values. From materials to labor, the inputs involved in rebuilding a residence have surged since the pandemic, and while some prices have stabilized, they remain elevated compared to pre-2020 levels.
“Aggregate construction costs in September 2024 were 40% higher than in February 2020, just before the start of the COVID-19 pandemic,” Roy said. “In just the past year, the price of concrete composite increased by 12.2%. Drywall, interior trim, and paint prices increased by more than 4% between January 2023 and January 2024.”
Not all costs have moved in the same direction. “The only material that declined in price from 2023 to 2024 is lumber, which had seen years of increases before the recent drop,” she said.
Labor pressures are also ongoing. “From January 2023 to January 2024, labor costs in the construction industry rose 6.2%, compared to 9.4% the previous year,” Roy said. “While the rate of increase is slowing, the cost to hire workers is still rising.”
“The increase in labor costs is largely driven by a significant workforce shortage plaguing the construction industry, which faced a deficit of nearly 500,000 workers in 2024,” Roy said. “That deficit will likely grow as many current workers approach retirement age. More than 20% of the industry’s employees are over age 55 and will retire from construction-related industries in the next decade.”
While reconstruction may sound similar to building a home from scratch, Roy noted that the economics and logistics of each are very different. New builds benefit from scale, efficiency, and cost control. Reconstruction typically doesn’t.
“During new construction, builders can often take advantage of large material orders and economies of scale to drive down prices,” she said. “For example, a builder of an extensive development or project may be able to order materials for hundreds of homes at one time, negotiating a more favorable price. For reconstruction, the builder may not have the same amount of leverage and be forced to purchase materials at prevailing market prices.”
The same limitation applies to labor. “Builders of new construction projects can negotiate pay for a large number of workers,” Roy said. “In many cases, developers can open the job to bid and select the lowest price. For a reconstruction project, the builder may have to choose from fewer available workers at prevailing rates.”
There are also procedural inefficiencies that come with rebuilding. “New construction usually involves a bottom-up planning process,” she said. “The builder starts with the foundation and works up. However, a rebuild usually tries to preserve any undamaged components of the home. The builder may save the foundation, but start at the roof and work down, which is a more inefficient approach that often creates additional costs.”
Access adds another layer of complexity. “In new construction, the site is often leveled and prepared for construction,” Roy said. “Builders don’t have to worry about protecting landscaping or navigating debris from a storm. However, those concerns are often part of a rebuild, making the builder’s job more challenging and costly.”
Roy said one of the most effective ways to close the coverage gap is through education and communication. Agents who understand reconstruction dynamics are better equipped to identify appropriate policies and coverage enhancements.
“Agents can better serve clients by staying informed about reconstruction challenges and identifying policies that offer comprehensive protection,” she said. “Some policies adjust coverage based on market pricing, while others provide extended coverage if rebuilding costs exceed policy limits.”
The insurer’s responsiveness also matters. “Carrier responsiveness can also vary significantly, with some more proactive in securing materials, contractors, and labor after a disaster,” Roy said.
“By understanding these differences and partnering with a knowledgeable wholesale broker, retail agents can guide clients to policies that prioritize swift and efficient rebuilding, enhancing the overall claims experience.”
What are your thoughts on this story? Please feel free to share your comments below.
