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Is Your Commercial Property Under-Insured?


You know how inflation is impacting your company’s bottom line, but do you know how it’s impacting your insurance coverage? Property values and construction costs can increase over time. If you don’t update your commercial property values regularly, you may have insufficient insurance to cover the cost of materials and labor in the event of a claim.

Construction Costs Have Surged

Recent supply chain issues and inflation have caused costs to increase. According to CBRE, construction costs were expected to increase by 14.1% in 2022. In 2023 and 2024, prices should moderate – cost increases are expected to be between 2% to 4%.

Indeed, price hikes do appear to be slowing this year. Turner’s First Quarter Building Cost Index shows that quarter-over-quarter costs were up 1.28% and year-over-year costs were up 7.49% in the first quarter of 2023. This is good news for the long-term outlook, but it doesn’t change the fact that construction costs are currently much higher than they were just a short while ago.

Insurers Expect Accurate Property Values

Insurance underwriters are keenly aware of the recent construction cost hikes and want to make sure insureds’ policies reflect the changes.

According to Kroll, an analysis showed that 69% of buildings valued from 2020 to 2021 were underinsured by at least 25% and 19% were underinsured by 100%. Risk & Insurance says underinsurance has hurt reinsurers and contributed to rake hikes. This, in turn, causes insurance companies to raise their property insurance rates. Sure enough, CIAB’s Q1 Commercial P/C Market Index shows that commercial property rates increased by 20.4% in the first quarter of 2023.

In addition to charging larger premiums, insurers may be stricter about property values. According to CIAB, respondents say carriers have been pushing for replacement value updates and asking about current updates to buildings.

Underinsurance Can Be Risky

Faced with rising premiums, property owners may not be eager to raise their property values and limits, as this will lead to additional premium. However, underinsurance can be risky.

Let’s say you have a property with a current replacement cost of $1,000,000. Several years ago, the replacement cost was $700,000 – and you’re still insuring your property at that level. Then, your property is destroyed. You only receive $700,000, minus the deductible, meaning you may not have enough to rebuild.

This is a worst-case scenario, but underinsurance can also hurt you in cases involving less severe losses. This is due to the coinsurance penalty – a common clause in many commercial property insurance policies.

According to IRMI, the details can vary depending on the carrier. Insurers typically require policyholders to maintain insurance that is at least equal to a percentage of the value. For example, if your building’s value is $1,000,000 and you have an 80% coinsurance requirement, you need to maintain coverage of at least $800,000. If you maintain less coverage, the coinsurance penalty will reduce your payouts – even if the loss is less than your limit.

Is Your Property’s Value Up to Date?

Although we’ve focused on commercial property valuations, the same principles apply to homeowners insurance. Construction costs and replacement values can rise over time – and they have surged recently – meaning it’s important to update your property values.

If you need help making sure your property is adequately insured, see your independent agent.