Colorado fire victims face steep construction costs exceeding insurance coverage

Rising construction costs will push the cost of rebuilding after Colorado’s most destructive wildfire beyond the insurance coverage of some homeowners, according to construction officials, industry. insurance and government.

Losses are expected to reach $ 1 billion in the Marshall Fire last week, which swept through suburbs between Denver and Boulder, Colorado. Reconstructing the nearly 1,000 destroyed homes and repairing damage to hundreds more will strain builders and already stretched supply chains.

Insurers believe the majority of homeowners in burnt out neighborhoods have sufficient coverage for most reconstruction costs. This contrasts with rural Kentucky hit by tornadoes last month, where some working-class homeowners had little or no insurance.

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In both places, labor shortages and the extent of the damage will make reconstruction 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 who did not have adequate coverage in place to make up for their losses,” she said.

About two-thirds of fire victims are typically underinsured, according to surveys by United Policyholders, a national nonprofit consumer advocacy group based in California. A survey of those affected by the 2020 wildfires in Grand and Larimer counties of Colorado found shortages often amounting to hundreds of thousands of dollars.

A major cause is the difficulty for homeowners to determine the amount of coverage they need, said Daniel Schwarcz, a University of Minnesota law school professor who has studied homeowners insurance. Part of the problem is that consumers have a wide choice, and many are switching to cheaper policies to maintain their annual premiums.

For buyers, “transparency is incredibly limited” 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 promote 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 refused,” she said.

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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. His estimate of $ 1 billion of insured damage includes homes in the Louisville and Superior areas and unincorporated Boulder County. as well as a large shopping area with a destroyed shopping center and hotel.

Colorado Insurance Commissioner Michael Conway said “there would likely be an underinsurance problem,” resulting from both inadequate coverage amounts up front and continued inflation. That said, over the next couple of years, as construction begins, “there will be so much that changes about inflation, construction costs, labor costs, when we get there.” to the point of rebuilding these houses, the world will probably look very different. “

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He noted that the Federal Emergency Management Agency provides financial assistance for underinsurance, although the agency typically does not act at a consumer’s request until a carrier has completed their payments. totals.

Insurers recognize that the proceeds from their policies won’t always be enough to cover damage, but say their agents have worked hard in recent years, in the face of other high-profile disasters, to promote the purchase of policies with them. more generous terms.

As in many cities across the country, the Denver area housing market has been hot over the past year. Low mortgage rates led to strong home buying demand that far outstripped the number of properties for sale, pushing up house prices.

In this August 17, 2021 file photo, seen in a long-exposure photograph, embers light up the hills as the Dixie Fire burns near Milford in Lassen County, California. (Associated press / AP press room)

Builders have 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 down by labor shortages and supply chain issues. Nationally, the cost of home building materials rose 21% in November from the previous year, while wages in residential construction rose 8.1% in October from the previous year. year, according to an analysis of government data from the National Association of Home Builders.

Boulder County is the most difficult and expensive area to build new homes in the Denver metro area, due to the limited supply of land and higher regulatory costs, said John Covert, director of the council. at Zonda. As houses in the city of Boulder have become more expensive, demand has increased in neighboring suburbs including Louisville and Superior, he said.

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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 almost impossible right now,” he said. “I think a lot of people are starting to think that the insurance coverage will be much lower than the current cost of construction.”

Underinsurance can lead to delays in rebuilding, and some people whose homes were destroyed in wildfires in the Boulder area in 2020 have yet to rebuild. “My wounds were gutted last Thursday, and I relived every moment of the trauma” of the fire that burned down his Boulder home in October 2020, said Kevin Mott, a dermatologist who lives in an RV for the instant.

His insurance failed and his reconstruction was delayed while he matched funding. He had a limit of $ 900,000 for the housing itself, plus $ 700,000 for the contents. His new home will cost around $ 2 million, including the upgrades needed to meet new local building regulations, he said.

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With the exception of insurers selling to wealthy owners, most carriers have eliminated the once common and relatively generous guarantees 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 home.

Many insurers, including State Farm and USAA, also include some type of inflation protection. But they still rely on homeowners to update their policies to account for renovations or expansions.


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Justin D. O'Neill