Inflation Guard and the Reasons Why

It is the phone call we have all had.  You’ve made the recommendation of certain coverages to the insured, but for whatever reason, the insured decides what you recommend is not needed – until the claim happens.  The court case that follows is a large part of the ‘special relationship’ between an insured and his or her broker.House and coins stack.

Enter ‘inflation guard’.  If the insured is calling about reducing their premium or has read over the renewal and has questions, they are calling about inflation guard.  I have heard everything from ‘it’s a scam to generate premium’ to ‘it’s a rip-off of the insured’.   And, I have had requests in writing, from insured’s and their attorneys to remove the endorsement.

This can leave a lot of us asking, why do we really need it?  Here’s why.

There has been an uptick of forest fires in California, Utah, and Arizona.  These fires have revealed that many homeowners are drastically uninsured.  One reason, the rising cost of lumber.

A good majority of houses are frame construction or have some sort of wood in their house.  The frames are usually pine, fir, spruce; sheathing is OSB; flooring can be birch, maple, or beech.  The US imports approximately $4.5 billion from Canada.  The remainder is from Russia, Germany, Brazil, and Chile.

Climate change is transforming the lumber industry.  In May of 2016, Alberta Canada saw a large wildfire.   Places like Brazil and Germany also have seen an increase in forest fires.  Russia too, although significantly under-reported, is having trouble.

In addition to lengthy and debilitating forest fires, climate change is also causing more pest out breaks.  Poland’s logging industry has seen the spruce bark beetle diminish their production.   And, dead and moldy trees leave forests more susceptible to fire.   It becomes a vicious circle.

Going forward, the loss of lumber due to pests and fire will increase the cost of lumber.  Think of the homeowners who have removed inflation guard.  In many cases reducing coverage, limits is an underwriting decision based on current pricing.  What happens if their loss happens two years later?

Logging IndustryUnless the industry is willing to reintroduce co-insurance on a larger scale, inflation guard is the only thing standing between the insured’s wallet and coverage needed to rebuild.

Confounding this problem is one of zombie homes.  These homes left behind due to bank foreclosures.  In recent years (after 2008) there has been an overabundance of foreclosures.  I am certain you have seen how the banks, insurance, and local government are scrambling to handle these situations.  It cannot be easy.

In 2011, during an electrical storm, one of the zombie homes in my neighborhood caught fire.  The unsecured insurance tried to put the blame on the bank hired contractors that had been working in the house.  Since everyone from the fire department to the claims adjusters said it was lightening, that did not come to fruition.  Now, it sits burnt out and barren.

Of course, any sheriff sale offers were ignored.  This house and those like it has brought down the market in the entire neighborhood.  Houses that would have sold for $300,000 to $350,000 10 years ago, now only go for a $200,000.

In my neighborhood and the surrounding area, I have done a review of Coverage A (dwelling) on homeowner’s policies.  At renewal, two of my agents are inviting policyholders into the office to see if they can lower or adjust the premiums since the value of the house has gone down.

But is reducing the coverage A really wise now with climate change and the cost of lumber increasing?  It is a hard subject to discuss – necessary not only for the insured but for the company.

Leave a comment or share an experience.

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