According to the Bureau of Labor Statistics, the Consumer Price Index increased by 7% in 2021, market the largest increase in inflation since 1982. I’m sure you have noticed it while getting groceries, getting gas, and going out to eat. Not fun.
Inflation is hitting the building market just as hard — if not harder — than everywhere else. Construction material prices rose 20 percent between January 2021 and January 2022, according to analysis of government data by the Associated General Contractors of America (AGC). According to the organization’s latest Construction Inflation Alert, “Unprecedented increases in materials costs, supply-chain disruptions, and an increasingly tight labor market have made life difficult for contractors and project owners alike.”
The price index for steel is the highest contributor to the overall cost of construction materials, itself rising 112.7 percent in the last 12 months. The price index for plastic rose 35 percent, and architectural coatings rose 24.3 percent. Lumber and plywood rose 21.1 percent.
With all those stats, have you taken the time to review your property insurance coverage?
Inflation Impacts Property Insurance
Property insurance is typically insured at replacement cost coverage. This means, how much would it cost to replace or repair the building with the same or similar materials? Play that forward a bit — with the increased cost of materials and increased cost of paying contractors, the replacement cost of your property last year is likely much less than where it is right now.
So, what can you do?
Review, Review, Review Your Property Insurance Policy
It’s far too common for a review of a Property insurance policy to happen after a claim occurs, and unfortunately, that is too late. It’s important to take the time now to understand your coverage.
Confirm exclusions, endorsements, deductibles, limits, and valuation. Commercial property policies are best covered when replacement cost coverage is applied versus actual cash value or functional replacement cost. If you’re not insuring at replacement cost, it’s important for you to understand how your building will be valued if a claim were to take place.
Make Sure the Replacement Cost Estimate Is Accurate
Even with normal levels of inflation, building values should be reviewed annually. Many policies contain an inflation guard provision, which means coverage limits are increased and on an annual basis they go up by a certain percentage shown in the declaration page. Unfortunately, though, this may not be enough.
If you are unsure of the replacement cost of one of your properties or buildings, Holmes Murphy can run a replacement cost estimator. Now, with unusually high reconstruction costs, you’ll want to make sure the estimate is done using current labor and supply costs. It also may be a good idea to reassess this on a quarterly basis while current inflation trends continue.
If we can help your company in any way, please don’t hesitate to reach out!