As Building Costs Increase, Do You Have Adequate Insurance Coverage?

As Building Costs Increase, Do You Have Adequate Insurance Coverage?

Rising labor and material costs can present gaps in coverage.
Contributors
Susan Johnson
Austin Koch, Property Portfolio Director, The Hartford
Kenneth Travers
Kenneth Travers, Property Technical Manager, Risk Engineering, The Hartford
Rising building costs don’t just make new construction more expensive, they can also put property and business owners at risk of having gaps in insurance coverage.
 
It’s estimated that 75% of commercial businesses are underinsured by at least 40%.1 This means a business owner may not be made whole after a loss, as well as cause a significant financial strain. That’s why regular property valuation assessments are vital to ensure adequate limits are in place in case of a loss.
 
“The cost for building materials and labor is increasing at unprecedented rates in large part due to the pandemic and supply chain issues,” said Austin Koch, property portfolio director at The Hartford. “This can have a significant impact on insurance coverage adequacy as it’s not possible to fix or rebuild property at pre-pandemic values with today’s higher construction costs.”  
 

What’s Driving the Building Cost Increase?

Since the pandemic started, the cost for many building materials increased.
 
  • Lumber prices per 1,000 feet of board were over $1,600 in May 2021. That’s nearly four times more expensive than before the pandemic begin in January 2020.2
  • Copper prices went from $5,567 per ton in January 2020 to $10,221 per ton in May 2021.3
  • Cement and concrete’s producer price index was 187.3 in July 2021 compared to 176.7 in January 2020.4
  • Paint prices increased nearly 9% from pre-COVID-19 costs.5
  • Ceramic tile costs saw a decline in 2020 before increasing 8.2% during the pandemic.6
And it’s not just material costs that increased, either. Construction labor costs also jumped in 2021. According to consulting firm Rider Levett Bucknall’s Quarterly Cost Report, the construction cost index in the second quarter of 2021 was 218.06.7 This is 2.9% higher than the first quarter – the largest increase in the last 20 years.8
 
The firm found a number of factors were behind the increasing costs in the construction industry:
 
  • Labor shortage
  • Demand
  • Supply issues
  • Increase in frequency and severity of catastrophic events9

The Building Cost Increase Is Likely To Stay

The cost for certain building materials has dropped since its peak earlier in 2021. Lumber, for example, went from over $1,600 per 1,000 board feet  in May to $647 in September.
 
Despite this, industry experts believe the costs will remain higher than in 2020 before the pandemic hit. In 2020, lumber prices were around $400 per 1,000 board feet.10 From supply chain shortages to damage due to storms and catastrophic events, many factors are affecting costs in the construction industry.
 
“Continued COVID-19 restrictions, resultant shipping disruptions and labor shortages in the trucking and longshoreman industries are having a longer-lasting impact on the rise in costs of construction materials. These conditions could last into 2022 or 2023,” said Kenneth Travers, Risk Engineering property technical director at The Hartford.
 

How Construction Cost Increases Impact Insurance

Because construction costs have increased, it can mean you may not have adequate insurance coverage. If a business sustains property damage, they may not be made whole because of the price of materials and labor climbing, Koch said.
 
“In addition to the difficulty in acquiring materials and durable goods used in construction, shortages of skilled and unskilled labor in the roofing, plumbing and electrical trades are compounding prices, which affects the insurance industry’s response on claims and losses,” Travers added.
 

Understanding Insurance To Value

The best way to make sure your business is adequately insured is to know your property value. Koch recommends business owners perform regular property valuation assessments, known as insurance-to-value. This can give business and property owners peace of mind after a loss.
 
“If there’s a major loss, the coverage amounts in a business’ policy might not be enough to cover replacement costs at today’s prices,” Koch explained. “Having an accurate assessment of the complete cost to replace your insured property can be the difference between recovering quickly or incurring additional loss from delays in repairs.”
 

How The Hartford Can Help With Asset Valuation

Valuing your assets isn’t always a fast and easy process. And when you consider price fluctuations with building materials and construction labor, it can complicate things. Having your agent or broker work with an experienced insurance company is important.
 
At The Hartford, our Risk Engineering specialists know the ins and outs of many industries. They understand the unique risks and challenges that businesses face. They can work with your agent or broker to help with the asset valuation process and can provide important insights which can assist in establishing more accurate replacement values.
 
“Our team of risk engineering professionals truly understand the construction industry and track replacement costs on a quarterly basis,” Travers explained. “During times of more rapid cost fluctuations, we access several industry data sources that track material and components pricing. We use that data to assist us in our property replacement cost valuation of a client’s facility to make sure there’s adequate insurance to value.”
 
 
 
1 Phoenix Business Journal, “Risky Business: Right-Size Your Insurance to Save Money, Protect Assets”
 
2, 3 Bloomberg, “Will Housing Prices Go Down? Why It Costs So Much to Build a New House”
 
4 Federal Reserve Bank of St. Louis, “Producer Price Index by Industry: Cement and Concrete Manufacturing”
 
5, 6 Gordian, “What the Data Says: Emerging Cost Increases of Interior Finishes”
 
7, 8 Rider Levett Bucknall, “North America: Quarterly Construction Cost Report: Second Quarter 2021”
 
9 Insurance Journal, “Extreme Weather, Repair Woes to Push Property Insurance Higher: Hippo CEO”
 
10 Trading Economics, “Lumber”
All coverages and services may not be available for all businesses or in all states. For details on what coverages and services are available to you, contact your agent at The Hartford today.
 
This site outlines in general terms the coverages and services that may be afforded under a Hartford policy. All policies must be examined carefully to determine suitability for your needs and to identify any exclusions, limitations or any other terms and conditions that may specifically affect coverage. In the event of a conflict, the terms and conditions of the policy prevail. All Hartford coverages and services described on this page may be offered by one or more of the property and casualty insurance company or life and accident insurance company subsidiaries of The Hartford Financial Services Group, Inc.
 
The Hartford® is The Hartford Financial Services Group, Inc. and its subsidiaries, including Hartford Fire Insurance Company. Its headquarters is in Hartford, CT.
The Hartford Staff
The Hartford Staff
Our editorial team spans writers, researchers, product specialists and subject matter experts. We cover the intersection where best practices and business insights meet.