Do You Have Adequate Insurance Coverage as Construction Costs Increase?
Rising building costs do not just make new construction more expensive, they can also put property and business owners at risk of having gaps in insurance coverage. Due to today’s construction costs increase, it is impossible to repair or rebuild property at pre-pandemic values, which might have a substantial influence on insurance coverage adequacy.
It’s estimated that the average commercial building construction has an increased cost of 18% (per the annual property report put out by Affiliated FM (a large commercial property insurer)
*Coinsurance is a penalty that is applied to loss settlement of a claim if the limit of insurance purchased by the insured is not equal to or greater than a specified percentage (usually 80%, 90% or 100%) of the value or the insured property.
The coinsurance provision specifies that the insured will recover no more than the following:
- the amount of the loss multiplied by the ratio of the amount of insurance purchased (the limit of insurance) to the amount of insurance required (the value of the property on the date of loss multiplied by the coinsurance percentage), less the deductible. The amount of the loss that is not payable to the insured, as a result of failure to comply with the coinsurance provision, is commonly referred to as a coinsurance penalty.
So, what is driving the building cost increase?
Several factors have been behind the increasing costs in the construction industry:
- Labor shortage
- Demand
- Supply issues
- Increase in frequency and severity of catastrophic events
How Construction Cost Increases Impact Insurance
Because building construction costs have increased, it can mean you may not have adequate insurance coverage. If your business sustains property damage (such as: burglary and theft, storm damage, fire damage, window damage, and roof damage), it may not be able to be made whole again due to the price of materials and labor climbing.
In addition to it now being difficult to acquire durable goods and materials for construction, the shortages of skilled and unskilled labor in the roofing, electrical and plumbing industries are compounding prices. This directly affects the insurance industry’s response for claims and losses.
Understanding Your Business Insurance
Knowing your property value is the best way to make sure your business is adequately insured. At Hertvik Insurance, we recommend business owners perform regular property valuation assessments, known as insurance-to-value. This can give you peace of mind after a loss.
How Hertvik Insurance Can Help with Asset Valuation
Valuing your assets is not always a fast and straightforward process. And when you consider price fluctuations with building materials and construction labor, it can complicate things. It is important to work with an experienced Hertvik Insurance agent. Our staff regularly works with, and is experienced with, different carriers to help you find the best fit for your unique needs.
At Hertvik Insurance Group, our team of risk specialists know the ins and outs of many industries. We understand the unique risks and challenges that businesses face. Our team can work with you to help with the asset valuation process. They also provide important insights which can assist in establishing more accurate replacement values.
Our team understands and specializes in the construction industry. During times of rapid cost fluctuations, we can access several industry data sources that track material and component pricing. The data is used to assist us in our property replacement costs valuation of our client’s facility. This ensure there’s adequate insurance to value.