Is Your Insurance Keeping Up with Inflation and Rising Construction Costs?
By Mike Liguzinski, Divisional President, Specialty Human Services
Rising reconstruction costs are a result of underlying, increasing costs of all items covered by your policy: building materials, (cement, copper, lumber, steel, aluminum) skilled labor, (carpentry, electrical, HVAC, plumbing), fuel, ordinance, and even insurance costs. As underlying costs continue to rise at a heightened rate, this upward trend will continue.
According to various indices such as the National Construction Cost Index, Rider Levitt Bucknall and the Consumer Price Index, reconstruction costs in the US have been rising steadily at an average of 3% or more since 2009.7 The danger in failing to keep pace with these inflationary trends is that in just a few years, it can leave you drastically underinsured at the time of a loss.
The table below shows that a building of $1M in replacement cost value when it is built would be undervalued by 16% by the end of the fifth year, if construction costs rise by 3% annually and the property value is not adjusted for on your insurance policy. Likewise, if construction rises at a rate of 4% annually, your property would be undervalued by 22% in the same amount of time.
| Construction Cost Increase | ||
|---|---|---|
| 3% | 4% | |
| Original Building Value | $1,000,000 | $1,000,000 |
| Replacement cost after year 1 | $1,030,000 | $1,040,000 |
| Replacement cost after year 2 | $1,060,900 | $1,081,600 |
| Replacement cost after year 3 | $1,092,727 | $1,124,864 |
| Replacement cost after year 4 | $1,125,509 | $1,169,859 |
| Replacement cost after year 5 | $1,159,274 | $1,216,653 |
“Simply applying a 2-3 percent inflation factor to an existing statement of values may not be enough, especially for dynamic organizations that frequently reinvent themselves through organic growth, acquisition and merger,” According to William K Austin, Insurance Property Valuation and Loss Settlement Clauses – Important Considerations.8 Talk to your agent to find out how your policy is maintaining pace with inflation. A preventative conversation today could save your organization from devastation in the future.
Are you ready to take control of your property insurance? Our 5 Steps to Taking Control can help you have a conversation with your agent.
