Homeowners insurance rates for Long Islanders are on the rise as building costs increase

Increases in the cost of home building are translating into higher homeowners insurance rates for Long Islanders, with some likely to face double-digit increases as they renew this year.

Homeowners insurance prices are driven by the cost to replace a home, and as expenses for labor and materials, such as lumber, have increased in the past year so have rebuilding costs.

Local insurance brokers say their clients will likely face higher premiums or the need to increase their coverage because of the higher costs of construction. That’s not to mention changes in flood insurance, which is generally sold as a separate policy.

"I would classify Long Island as approaching a hard market and approaching it extremely fast," said Michael Cracco, CEO of Completely Covered Insurance Agency in Massapequa.

Reconstruction costs rose by 11.5% in New York in January compared with a year earlier, which was the largest increase in any state, according to a report published by Verisk, a Jersey City-based data analytics company that serves the insurance industry. The national average increase in rebuilding costs, including materials and retail labor, was 7.2% compared with a year ago.

When Richard Ser renews his policy later this month, he is slated to pay about $1,900 a year, or nearly 19% more than the $1,600 he paid for coverage during the past 12 months. The 63-year-old Levittown resident was surprised to find his policy will cost so much more but acknowledged he has experienced some of the supply shortages driving higher prices through his work as an electrician.

"Between the California wildfires and all the floods plus the supply chain shortage, it’s a prime opportunity for insurance companies to shuffle the deck again," Ser said.

And he isn’t expecting any discounts once supply shortages are resolved. "When costs go down, my insurance premium should be lowered, but that never happens," Ser said.

For insurers who priced policies based on assumptions made years ago, there could be some catching up to do, said James Sutton, president of the James F. Sutton Agency in East Islip. He noted one client whose insurer raised the replacement cost of her home by 20% to more than $750,000, raising her premium by $500 a year.

"From where they were just three to four years ago, to where they are now, the costs have gone up dramatically," Sutton said. "I think you’ll see homeowners prices rising to reflect the increase."

For many homeowners, a premium hike could be hidden in an increase in their monthly mortgage payments, since insurance and tax payments are often rolled into the total.

An analysis conducted by Bankrate found the average homeowners insurance rate in New York was $1,068 this month for a policy with $250,000 in dwelling coverage, $125,000 in personal property coverage and $300,000 in liability coverage. The sample policy has a $1,000 deductible. The analysis based the policy on 40-year-old male and female homeowners with a clean claim history and good credit using data from Quadrant Information Services.

The cost of coverage can vary widely depending on the type of policy and coverage limits selected by policyholders.

Bad news, good news

Two major factors affecting the cost of replacing a house are its square footage and local construction costs, according to the Insurance Information Institute, a Manhattan-based nonprofit backed by the insurance industry. Other attributes of a house, such as the type of exterior construction and roofing materials used can also affect prices.

That’s bad news for homeowners given how much construction costs have risen in the past year, said Mitchell Pally, CEO of the Long Island Builders Institute in Islandia.

"The cost of products have gone up from the lumber, to the cement, to the refrigerators, to the stairs — every part of the house, the cost has gone up," he said. "As a result of that, from a liability standpoint, the insurance company now has to spend more money, where they may have spent $250,000 to build your house now they’re going to have to spend $400,000. That, of course, has an impact on the cost of your insurance because the cost of replacing your house has gone up significantly."

More than half of the cost of building a home is tied to lumber and other wood products, and lumber prices have experienced unprecedented spikes since the pandemic started. The Random Lengths Framing Lumber Composite, a pricing report published by Fastmarkets, reached $1,217 for the week ending Feb. 10. That's up 26% from a year ago, while the gauge has more than doubled since early November. The composite is made up of the prices of 15 types of framing lumber, which vary in length and by source.

Delayed deliveries also contribute to higher insurance premiums, Pally said. Most homeowners insurance policies have "loss of use" provisions to cover the costs of living elsewhere if a policyholder’s house is uninhabitable.

If a project is delayed, "the additional month of hotel costs is being picked up by the insurance company and their costs have gone up," Pally said. "That’s why it’s not just the cost of the project. The supply availability also plays a role."

For a 1,500-square-foot house, Cracco, the Massapequa insurance agent, recalls replacement costs around $225 per square foot before the pandemic. Now, he said, it’s common to see carriers charging $350 per square foot in replacement costs.

The "inflation guard" built into many insurance policies, which increases the insured value of the property each year to ensure the coverage keeps up with the cost of reconstruction, didn’t affect premiums much in the years before the pandemic, Cracco said. "Now it’s affecting premiums tremendously," he said.

But recent increases in Long Island home prices aren't affecting insurance rates. "It has nothing to do with market value or the mortgage amount," said Pat Howard, a property and casualty insurance expert at Policygenius, an online insurance marketplace based in Manhattan. "It has to do with the cost of construction materials and labor."

It’s the rebuild cost that counts, which is good news for Long Islanders given rapidly appreciating home prices. Howard said education is important for homeowners. A 2020 survey published by Policygenius found half of homeowners surveyed thought home insurance coverage is tied to a home’s market value.

Severe storms wreak damage

More frequent severe weather is also driving up claims and leading insurers to increase premiums. Last year’s hurricane season was the third-most active on record and damaging wildfires raged in the West. Hurricane Ida was the fifth-costliest tropical cyclone to hit the United States, causing $75 billion in damage, doing particular damage in Louisiana, according to the National Centers for Environmental Information. Superstorm Sandy, at $80 billion in damage, ranks fourth.

Severe weather events and higher building costs created a "perfect storm" that led the American Property and Casualty Insurance Association last year to warn policyholders to review their coverage to ensure they were financially protected.

"Climate change has a significant impact, not only on current rates but on future risk that insurance companies are willing to take on," Howard said.

Waterfront properties attract particular attention from homeowners’ insurance companies, said Tim Zawacki, principal research analyst covering the U.S. insurance industry for S&P Global Market Intelligence.

"Insurers are much more focused on climate-related risks for coastal properties," he said, noting the types of wind-related risks tied to storms that are covered under homeowners’ insurance policies, rather than separate flood policies.

Danielle Lewis, of Hicksville, is among those confronting the costs of living near the water. Lewis, 31, and her fiance recently reached a deal to buy a three-bedroom home in Mastic Beach.

She figured she would pay around $1,000 for homeowners insurance but didn't account for the cost of a flood insurance policy. First, her car insurer wouldn't offer a policy for the house, which is about a mile from the bay.

"Finding insurance was a little tough at first," she said. "No company wanted to cover us."

She ended up paying about $1,200 for her homeowners insurance and nearly $1,000 for a separate flood policy.

"Being new to this I didn't know it was two separate policies," Lewis said. "That was a learning experience."

Catching up to costs

In addition to increases tied to building costs, some market dynamics among carriers are also leading to higher prices, said David Levine, president of Newbrook Insurance Agency in Port Jefferson Station. He said Long Island had been a challenging market to obtain homeowners insurance until around 2014 when some lower-cost regional insurers started selling locally.

"Now we’re seeing a reversal of the trend where some of the regional players are actually pulling out of the market and the ones that are staying are raising rates," he said, noting some of those insurers have increased rates by 20% or more and are still the cheapest available.

New York’s home insurance market has been pretty stable, with a sufficient number of plans continuing to sell coverage, said Ellen Melchionni, president of the New York Insurance Association in Albany, which represents property and casualty insurers.

"If companies don't price it right, and their claims outweigh premiums and they're losing money in that line … they have to make market decisions for solvency purposes," she said. "We want insurance companies to be there to pay the claims when they come in."

Kevin Locke, 51, dodged a 22% rate hike by switching insurers. The annual premium for his five-bedroom home in Melville was slated to increase to almost $3,500 from about $2,800, which was due in part to the fact that his carrier said it would now cost more to rebuild his home. By shopping for a new insurer, Locke’s coverage only increased to about $2,900. But his deductible increased to $2,500 from $1,000, he has less liability coverage and he will have to contribute more out of pocket in the case of wind damage from a storm.

Locke, an attorney, said it was helpful that he has an insurance agent he trusts. Levine, of the Newbrook agency, was his suitemate in college. "I have a better trust level with him than some people might just have with someone who handles their insurance," he said.

He said he doesn’t expect his rates to drop anytime soon.

"This particular home, I am only in for a few years, but I've owned homes for about 14-plus years, and I've never had a case where my insurance policy went down upon renewal," Locke said.

By Jonathan LaMantia

jonathan.lamantia@newsday.com@jonlamantia

Jonathan LaMantia covers residential real estate and other business news on Long Island. He previously covered the business of health care for Crain's New York Business.