The real estate market in Colorado Springs is crazy. Homes are commanding prices 20 percent higher than they did just a year ago. Some even higher.
For example, one house in northeast Colorado Springs, which sold three years ago for $238,000, recently drew a bid of $410,000 — nearly 10 percent over the asking price of $375,000.
So property owners might reasonably ask if their homeowners insurance would adequately cover a loss in a market that’s pushed their home values sky high.
The answer to that question is yes and no.
Another reported problem has arisen for those buying homes in wildland-urban interface areas — almost the entire west side of Colorado Springs is considered WUI. Due to the extreme fire risk, aggravated by drought and high temperatures, some insurers reportedly are shying away from covering those structures, though coverage is available if homeowners are willing to pay up to 25 percent more.
But one thing is certain: The time to discover whether your property is adequately insured is not after it’s burned down.
“Some people find out they’re not properly insured when a loss occurs,” said Heather Mellinger, an owner of Springs Insurance Brokers.
Few people appreciate the sea change in home prices like El Paso County Assessor Steve Schleiker.
His recently completed reappraisal of property for tax purposes reviewed sales between July 1, 2018, and June 30, 2020. Values spiked during that period by up to 30 percent, depending on the classification of property, and have taken another leap in the last year.
Asked whether rising home values should trigger a reassessment of coverage, Schleiker said via email, “This is most certainly something every property owner needs to be aware of. The question many ask is ‘should you increase your homeowners insurance if your property value goes up?’”
Not necessarily, he said.
“A rise in market value, in and of itself, doesn’t necessarily require an increase in your home insurance dwelling coverage,” he said. That’s because homeowners insurance is based on the estimated cost of repairing or replacing the structure should it be damaged or destroyed.
Given that the cost of some building materials also has surged, it’s possible some policies might not cover all replacement costs. “Not reviewing your policy to ensure you have the proper valuation coverage can have consequences,” Schleiker said, noting that some homeowners who lost their homes in the 2012 Waldo Canyon fire didn’t have adequate coverage to pick up the entire tab on a rebuild.
Vincent Plymell, assistant Colorado insurance commissioner, echoed Schleiker, saying skyrocketing sales prices are based on the market value of the homes, which is different from replacement cost.
“Just because the market value of a home has increased by 30 percent ... doesn’t mean the cost to repair or replace has increased by the same amount,” Plymell said in an email.
But Plymell, like Schleiker, advises homeowners to be informed.
“Homeowners should talk to their insurance representatives (their agent/broker or the company) at each policy renewal to ensure the coverage is current based on current building costs,” he said. “Most insurance companies update their replacement cost estimators on a regular basis and should take these costs into consideration.”
He also advises policyholders to report changes to the property, such as any remodels or additions, so the policy truly reflects the property being insured.
In addition, he suggests buying “extended replacement cost” coverage — to cover extra, unanticipated reconstruction costs that you would otherwise have to pay out of pocket — that would kick in should there be a total loss.
Mellinger, with Springs Insurance Brokers, seconded Plymell’s motion on extended coverage, saying such policies can add up to 100 percent of the home’s value in coverage.
“You’re not going to find homes burned to the ground that are not covered if the policy is written correctly,” she said by phone.
She also said it’s important to report changes to the property, so the policy truly mirrors the value of the property’s replacement cost. And she said to bear in mind that inflation plays a role as well, which she pegged at 3 to 5 percent per year. “I wouldn’t let a policy sit for more than three years without reviewing it,” she said.
Local insurance agent James Whitlock agrees. He suggests contacting your agent 30 to 35 days prior to renewal of coverage. “That’s the key time when things can be looked at before renewal,” he said.
Insurance premiums on property are being driven by rising costs of not only lumber, but also paint, drywall and shingles, he said.
“Any time we see increases to materials, we’re going to see an increase in cost of insurance, too, because we have to account for that if something were to happen [a loss],” he said.
If there’s a mortgage against the property, an insurance premium increase will show up as part of a higher mortgage payment (the insurance premiums are placed in escrow and paid to the company), as will higher taxes due to rising values.
“The key to remember with insurance is, we’re trying to insure you for the amount it would cost to rebuild your home from scratch, not necessarily what the value is,” Whitlock noted.
If you’re buying a house close to wooded areas where wildfire could pose a threat, be ready to do a little insurance shopping.
Plymell said so far the Division of Insurance hasn’t seen issues with availability of insurance among the 80 homeowner insurers in Colorado, but that doesn’t mean all companies write policies for high-risk properties.
Homeowners might need to consult a broker to find a carrier willing to insure a home nestled close to the forest and at higher risk for wildfire.
Some carriers simply won’t insure structures in certain ZIP codes, Mellinger said, but added, “As a broker I can find a policy for anyone. If you get rejected by a standard carrier, like State Farm, Farmers, or if you get rejected for a home in, like, Crystal Park, then you go to an excess and surplus market.”
Those insurers charge more, but will write such policies. Mellinger said there are some spots in Colorado, though, where it’s next to impossible to get insurance, such as for a log cabin in a remote wooded area over difficult terrain and miles from a fire department.
Plymell noted companies cannot drop a policyholder mid-policy, except in very specific circumstances, like fraud, but they can choose not to renew a customer, and that does happen.
He also said companies have to justify their premiums. “They can’t just make up figures,” he said. But he adds that due to the prevalence in recent years of wildfires and hail, insurers’ premium requests have been justified. Some companies are actually allowed to charge more than they do.
Lastly, consumers are encouraged to contact the insurance commissioner’s office at 303-894-7490 or DORA_Insurance@state.co.us with questions or complaints.