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November 7, 2022

Is inflation leaving your business underinsured?

Part one of a three-part blog series

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 U.S. has 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 with hurricane season, the ongoing threat of wildfires, earthquakes, convective storms, and other natural catastrophes. When considering how you can protect your business, revisit insured values, policy limits and sub-limits, and other elements in the insurance contract. This will help you assess how your policy might respond to significant increases in costs to rebuild and restart operations. While inflation has been a widespread phenomenon, construction material input prices have been uniquely affected, outstripping other sectors. The graph below referenced in Anticipating Material Supply Chain Issues in Construction Projects shows the average material price increase and unequivocally shows that the construction-sector increases are leading the pack.

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“Material prices are at an all-time high, which impacts the cost to rebuild following a catastrophic event.  Property values need to be updated to ensure you are properly insured,” said Denise Perlman, EVP, of Business Insurance and National Partnerships, Marsh McLennan Agency.

Focusing on the accuracy of your data

With heightened underwriter scrutiny, insureds are under pressure to report replacement values that reflect the current construction environment more reliably. If insurers are still questioning if the reported values are accurate, they may introduce coverage limiting clauses, endorsements, and provisions during your renewal to avoid bearing risk relating to undervaluation.  

Some insurers may try to impose a coinsurance provision, a charge to 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. 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.   

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If you think your business is at risk of being underinsured, reach out to a Marsh McLennan Agency representative today to help prepare for an unknown future.

Read parts two and three of this series to learn more about how inflation could effect your business.