Homebuilders and insurance companies are urging homeowners to review their coverage to avoid the rude shock that greeted some Arkansans after a devastating EF3 tornado sliced a 34-mile path through Pulaski and Lonoke counties March 31.
Many discovered that their insurance policies won’t cover the full cost of rebuilding in inflationary times.
Wynne residents faced the same awakening after a tornado from the same line of storms wiped out much of the Cross County seat.
“Building costs have changed so much over the last four years that unless individual homeowners were really on top of their insurance policies,” they are going to face hardships, said John Turner, chairman of the Home Builders Association of Greater Little Rock and owner of custom homebuilder Turner & Sons Construction of Little Rock. “I think we’re going to see a lot of underinsured homes in those areas.”
Some residents will choose to leave rather than wait months for their homes to be rebuilt, Turner added. “You’re going to see some vacant lots … that may take four or five years to put a new home in.”
The U.S. Small Business Administration said that as of Tuesday, 3,257 Arkansas property owners had reported major or minor damage as a result of the March 31 storms. The SBA had 294 applications for low-income loans, said spokesman Corey Williams.
“If you have a replacement cost policy, you’re going to be in great shape,” said Darin Hoover, chair of the Technical Affairs Committee of the Independent Insurance Agents of Arkansas and president of the McGhee Insurance Agency of Little Rock.
Some policies provide extra coverage to account for rising interest rates and construction costs.
Insurance leaders told Arkansas Business that property owners should review their policies annually to discuss insurance needs and should be aware of the rising costs of building materials and labor.
In the last few years, the rising cost of rebuilding has overtaken homeowners’ coverage limits, said Jeffrey Brewer, vice president of public affairs for the American Property Casualty Insurance Association, based in Chicago.
He suggested a yearly talk with insurers to possibly adjust coverage limits and take into account home renovations and improvements. Adequate coverage is necessary for all property owners, insurers say, particularly in areas of frequent, powerful storms.
“A lot of times people overestimate how prepared they are for an event,” Brewer said. “And having that conversation can help you make sure that you don’t have any gaps in your coverage.”
Construction Issues
In the next 30 to 90 days, once the insurance claims are paid, Nathan Cooper expects clients to start calling him to rebuild their houses. Cooper, owner of River Valley Builders Inc. of Little Rock, said it could take six months to a year to rebuild a home.
“This may not be a huge event on a national scale, but on a local scale, this is really a huge event, and finding qualified contractors to quickly get on their project is going to be a little daunting,” said Turner, of Turner & Sons Construction.
In addition to supply chain issues, the construction industry also faces a labor shortage.
The construction industry will need to attract about 546,000 more workers this year to meet the demand for labor, according to a February news release from the Associated Builders & Contractors of Washington.
“The shortage of construction workers will not disappear in the near future,” ABC Chief Economist Anirban Basu said.
Rising Costs
Ron Harris, owner of the custom homebuilder Summerwood Inc. of North Little Rock, said the cost of construction for a home in central Arkansas was about $142 per SF pre-pandemic. Now, it costs about $160 to $178 per SF, and in some areas of Little Rock the cost can be about $190 per SF, he said.
As a result, homeowners’ policies have been rising in recent years.
“We have been taking hundreds of calls, especially since COVID, because inflation has gone up and the price to rebuild a home has gone up, so our customers have been getting huge increases in home values to the point that we even thought this is ridiculous.”
Some of his clients question why he was insuring a house for $220,000 when it was recently purchased for $120,000.
“It’s the replacement cost. We don’t care what you paid for it or what you could sell it for. We care about what it costs to build it back,” Hoover said. “And now those people are going to be very happy.”
But for those people who bought their home years ago, it’s highly likely that the insurer did raise the replacement cost value of the home over time, the Arkansas Insurance Department told Arkansas Business via email.
For homeowners needing financial help to cover the gap between the cost to rebuild a home and what the policy provides, the SBA offers disaster assistance loans. Homeowners can borrow up to $200,000 at an interest rate of as low as 2.375% for 30 years, and 90% of homeowners are going to get that rate, said Williams, of the SBA. The loans come with a 0% interest accrual for the first year and a 12-month deferment on the first payment, he said.
To encourage people to rebuild, the city of Little Rock is waiving all permit fees for properties in the path of the tornado and about half a mile on either side of it, said Jamie Collins, director of planning and development for the city.
The city also is not requiring a plot plan for people who are rebuilding on the same footprint. The city assumed that if the property was approved to build on before the tornado, it still should be approved, he said.
Depending on the size of the property, the waived fees will save homeowners hundreds of dollars and commercial property owners thousands of dollars, Collins said.
It hasn’t been determined how long the waiver of fees will last, but he expects it to be at least a year or two. “We want to make sure we cover everybody,” he said.
Hoover said that he expects insurance rates are “going to be bad. Rates are already up 15% with most companies” for homeowners’ insurance.
“I would call this another round of COVID for the insurance industry in Arkansas,” he said. “It’s a major disruption.”
In addition to roof damage, a house could have sustained structural damage from the tornado. “A lot of these tornadoes create a great amount of lift, and they’ll actually lift these structures and twist them and turn them,” said Turner, the homebuilder. “And it takes a pretty close inspection to make sure that there’s no structural damage beyond just some missing lumber or missing roof pieces.”
The effects of the losses from the tornado will probably show up on rates for next year or 2025, said Jimmy Harris, compliance director for the Arkansas Insurance .
Insurers expect tornadoes to happen every few years, and they guard against that, Harris said, so there isn’t an immediate need to raise rates on property owners.
Still, rates have been climbing in Arkansas. “Insurers haven’t had the best experience in Arkansas in the last couple of years,” Harris said.
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