Tim Ramsayer ,
Valuation Practice Leader
07/08/2022 · 3 min read
High inflation, supply chain challenges, and a shortage of skilled labor are causing significant increases in the cost of construction. As a result, the insured replacement cost of many commercial properties across the US have also increased substantially — an analysis by Associated General Contractors found that materials and services used in nonresidential construction went up by nearly 21% between April 2021 and April 2022.
For property owners, the current landscape poses a new challenge: What will it cost you to rebuild following a catastrophic loss? And is your existing property coverage still adequate? In the face of an anticipated above-average hurricane season and the ongoing threat of wildfires, earthquakes, convective storms, and other natural catastrophes, it is important to revisit insured values, policy limits and sub-limits, and other elements in the insurance contract to assess how your policy might respond to significant increases in costs to rebuild and restart operations.
Property insurance pricing has increased for several years and is still trending upwards. And as the costs to rebuild and recover fluctuate, insurers are focusing more acutely on valuation of properties and reported business interruption figures.
With heightened underwriter scrutiny, insureds are under pressure to more reliably report replacement values that reflect the current construction environment. If insurers are not satisfied that reported values are accurate, they may introduce coverage limiting clauses, endorsements, and provisions during your renewal with the aim of avoiding bearing risk relating to undervaluation.
Some insurers may try to impose a coinsurance provision — effectively a charge to be borne by the insured when there is a loss, resulting in a lower insurance payout. Insurers may also limit coverage for one or more locations to the values reported. In some instances, insurers may agree to a margin clause, which typically states the maximum amount paid is between 110% and 125% of the reported value. Insurers may also opt not to renew policies where they view the reported values as being well below market averages or where an insured has sustained prior losses that exceeded the values previously reported.
Aside from complicating the loss recovery process, policy wording that limits coverage to the values reported can potentially put insureds at risk of violating lender requirements, lease obligations, or other agreements to maintain a specified level of insurance.
Insurers rely on the accurate reporting of replacement values to determine premiums, decide how to deploy their capacity, and in some instances, purchase facultative reinsurance. Insurers expect insureds to report accurate replacement values in line with valuation conditions established at the start of the policy term. As construction prices remain high, and supply chain challenges lead to longer timelines and delays, it is wise to consider the following actions ahead of your next renewal:
As construction costs and supply chain challenges continue to impact the value of properties and their contents, organizations should assess the adequacy of their insurance coverage and aim to make adjustments that will help them to recover following a catastrophic event.
For further information, contact your Marsh broker.