Building, Labor Costs Go Through The Roof
Insurance Check May Not Cover All Repairs That Old Homes Need
as posted at www.nola.com
Thursday, December 15, 2005
Like many local homeowners, Gordon Serou Jr. spent the first few weeks after Hurricane Katrina shopping for repair estimates.
His two-story Uptown home on Lowerline Street sustained extensive roof damage, and early estimates indicated the repair job would cost several thousand dollars.
A small construction firm in Covington thought it could do the job for $4,700. And a well-known Metairie contractor turned in an estimate of $5,600.
But Serou had to hold off on repairs until his insurance claim was processed. And in early November, still waiting for his claim to be settled, Serou decided to go for another estimate. The roofer came back with a stunning bid: $11,500.
"These guys figured if you wanted it done, you were going to pay it," Serou said.
Phil Hoffman, president of the Homebuilders Association of Greater New Orleans and owner of Hoffman Custom Built Homes LLC, estimates that building costs have climbed roughly 30 percent since the storm, while labor rates have jumped as much as 50 percent.
And they could go higher.
"We haven't begun to see what materials costs are going to do," Hoffman said. "Most people haven't gotten their insurance checks yet. When they do, then you're going to see the crunch. It hasn't hit yet."
Insurance companies work to incorporate building price fluctuations into their settlements, but it's often hard for them to keep pace with the very latest increases. And the price-tracking systems insurance companies use fail to take into consideration the expense tied to replacing some of the older architectural features on New Orleans homes.
The bottom line, according to Shahid Hamid of the International Hurricane Research Center at Florida International University in Miami, is that New Orleanians may have trouble rebuilding for the amount of insurance money offered to them.
A lot of people probably will find themselves needing to take out loans to make up the difference between insurance and the costs of rebuilding.
"They will not cover it. You basically have to borrow the rest," said Hamid, director of the Laboratory for Insurance, Financial and Economic Research at the hurricane center.
High demand pricing
The price of building materials was rising even before Katrina blew through, thanks to a flurry of construction activity in China and the rising cost of oil, a key component in asphalt shingles, PVC pipe and other building materials.
Now the wave of post-Katrina storm repairs is leaving some building materials in even shorter supply and adding another layer of price increases known as "demand-surge."
"It's a supply and demand enterprise," said Charles Marceaux, executive director of the Louisiana State Licensing Board of Contractors, which issues temporary licenses to non-Louisiana contractors. "What you're seeing is the law of economics in a crisis."
Commodities like drywall or wallboard that cost $8 a sheet before Katrina are now retailing for closer to $10. Electric wiring, which sold for $33 for a 250-foot roll before the storm, now sells for as much as $68 a roll. And the price of PVC piping has more than doubled from $25 to $54 per 1,000 feet.
Private insurance companies and the government flood insurance program say they make every effort to base their settlements on real construction costs by using price lists generated by national construction research and software firms.
These software companies, such as Marshall & Swift/Boeckh, a Los Angeles consulting company that says it does business with 90 percent of the property insurers in the United States, and Xactware Inc., a Utah-based software firm, monitor geographic-specific prices for construction materials and labor costs.
But critics charge that these research practices fall apart in the Wild West environment that follows a natural disaster. Amy Bach, executive director of the nonprofit insurance consumer advocacy group United Policyholders, doubts that prices are updated and passed along to insurance adjusters on the ground quickly enough.
"I don't believe that the programs factor in sufficiently post-disaster price spikes. I think they're oriented toward your garden-variety house fire prices, which is completely different from the pricing you get after a large-scale disaster," Bach said. "After every wildfire, we have the same problems. They just don't get their numbers up fast enough."
Tracking price fluctuations after a natural disaster isn't easy, the consulting firms say, but they argue that the Internet allows them to automatically upload the latest prices into the estimating software used by insurance adjusters in the field.
Indeed, Marshall & Swift/Boeckh has had three New Orleans area price updates since the storm: Sept. 28, Nov. 10 and Nov. 22. Xactware has had four: Sept. 15, Oct. 1, Oct. 20 and Nov. 18.
The difficulty, they say, is that the worst lag in pricing information is in the areas most affected by the storm. Because repairs start the quickest in the outlying areas affected by a storm -- such as in, say, Mobile, Ala. -- insurance adjusters will get the most accurate and updated data in those areas first.
By contrast, in hard-hit areas like New Orleans, data is incomplete because not many repairs have been completed and not as many insurance claims have been closed. That lag also probably will be worse in New Orleans because people were prevented from going back to their homes for weeks because of flooding and many people are waiting to see what the rules are for rebuilding before they embark on repairs.
"There hasn't been enough repair activity in New Orleans to assess what the total demand-surge impact is going to be," said Marsha Berenson, marketing manager for Marshall & Swift/Boeckh. "It's really too soon."
Unique architecture
The difficulty in pinpointing building material prices isn't the only thing working against homeowners trying to repair and rebuild.
Bach said the fact that many New Orleans homes are older dwellings with lath and plaster walls, or decorative moldings that are much larger than those used today, also will make it harder for people to collect the amount of insurance money needed to repair their homes to pre-storm condition.
"Because of their heavy reliance on computer programs, I think (insurance companies are) much better equipped to handle stock suburban-style housing developments than anything that's unique or old," Bach said. "People are going to really have to fight hard to get the same quality."
"There's no way adjusters are going to pay to replace 'like kind and quality.' The insurers are going to try to get away with as little as they can. It's just economics," Bach said.
Insurance companies know that a certain number of people won't have the resources to fight their estimates, so keeping initial estimates low is a way for insurance companies to reduce their payouts.
"Their marching orders are to get in and out as quickly as possible," Bach said.
Loretta Worters, vice president at the Insurance Information Institute, a trade group for insurance companies, said companies try their best to do similar kind and quality in repairing storm damage.
For example, as long as a homeowner has a replacement value policy, an insurance company should replace a 14-inch decorative molding with a 14-inch decorative molding, rather than the standard two-inch molding found in many newly constructed homes. But there are practical limits to what they can do: those moldings probably won't be cypress and they won't have the hand-carved details of the originals.
"They have to have something of similar kind and quality," Worters said.
Leading homeowners insurance companies say they'll make every effort to replace what policyholders lost -- if they have the right policies for coverage.
"As long as folks have the proper coverage, we will do our very best to find either the replacement or we will find them like product," said Fraser Engerman, a spokesman for State Farm, the largest homeowners insurer in Louisiana.
"It really is a tough question, only because claims are handled on a case-by-case basis depending on the type of policy the homeowner has," said April Eaton-Robinson, spokeswoman for Allstate Insurance Co., the state's second-largest insurer of homes. "It is quite possible that they can receive additional payment to reimburse them for the actual cash value for the cost of the repair."
What can you do?
Homeowners who receive settlements that are inadequate for their repairs seem to have few options.
"That's the problem when you have labor costs that go up and materials costs that go up," Worters said. "You may have to pay the difference."
Because rising price dynamics are common after a storm, Worters said many insurers now offer "extended replacement cost coverage," or a policy rider that will pay up to 125 percent of the policy so that the homeowner has an extra cushion to cover inflating prices.
"That's the beauty of having a kind of policy that takes that into consideration," Worters said.
But Bach says it's ridiculous that insurance companies have started peddling "extended replacement cost policies" for what should be covered in regular "replacement value" homeowners policies, which should replace a homeowner's structural losses with construction and materials of "like kind and quality."
"The fact that you even have to do that is a ripoff," Bach said.
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Rebecca Mowbray can be reached at (504) 826-3417 or rmowbray@timespicayune.com.
Greg Thomas can be reached at (504) 826-3399 or gthomas@timespicayune.com
United Policyholders is a non-profit organization founded in 1991 and dedicated to educating the public on insurance issues and consumer rights. UP publishes educational materials and serves as a resource for individual and business policyholders and residents of communities with insurance problems. UP’s Amicus Project provides information to courts of law to support policyholders’ legal rights. UP unites policyholders and their advocates by sharing information. Write to UP at 110 Pacific Ave., PMB 262, San Francisco, CA. 94111, call us at (510) 763-9740, or visit our website at www.unitedpolicyholders.org.
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