Underinsurance can greatly impair, or even bankrupt, a business trying to recover from a major loss. According to recent studies, an estimated 75 percent of commercial businesses are underinsured by an average of 40 percent or more. And up to 40 percent of businesses fail after a disaster.
Insurance to value is a critical element of any well-constructed property insurance program. It is essential that values be updated regularly to account for rising construction costs. Keeping values up to date can protect a business by providing the appropriate amount of coverage needed for rebuilding should a major loss occur.
The Demand for Building Materials
The world has suddenly gotten smaller. The rapid modernization of high-growth nations such as China, India and others has greatly impacted the cost and availability of materials everywhere. Building materials once manufactured domestically are now frequently made overseas. More importantly, materials that are in high demand in the U.S. are also in high demand elsewhere.
It is truly a global economy when it comes to building materials… they are shipped everywhere. Your neighborhood lumber yard could be competing with massive foreign government projects for the same materials. For this reason, price increases for building materials may more closely parallel the inflation rates of rapidly-expanding nations than our own.
When demand exceeds supply, prices go up. For several years the global demand for building materials has outstripped supply. Price changes for building materials in the U.S. are considerably higher than price changes for consumer goods overall.
As an example, the U.S. Bureau of Labor Statistics reports that the All Items Consumer Price Index increased 1.7% between December 2011 and December 2012.
By comparison, building materials price changes, as documented by Marshall & Swift/Boeckh over the same time period, December 2011 to December 2012, were significantly higher:
The cost of building materials has escalated so rapidly in recent years that many commercial properties cannot possibly be reconstructed for the values stated on their insurance policies.
Bottom line – construction costs are increasing, and buildings constructed just two years ago may not be able to be rebuilt at anywhere near the original cost. It’s important to evaluate the cost to rebuild the property, not its current resale or appraisal value. Consult with your TCI Insurance agent to ensure that your property is not currently underinsured.