Are Your Property Values Still Accurate? Why Inflation and Rising Construction Costs Matter More Than Ever
Imagine this: A fire damages your commercial building tomorrow. You file a claim expecting your insurance policy to cover the cost of rebuilding, only to discover that the amount insured falls hundreds of thousands of dollars short of today’s actual construction costs.
Unfortunately, this scenario is becoming increasingly common.
Over the past several years, inflation, supply chain disruptions, labor shortages, and rising material costs have significantly increased the cost of rebuilding commercial properties. Many business owners assume their property values are still accurate because their building hasn’t changed, but the reality is that replacement costs may have increased substantially.
If you haven’t reviewed your commercial property values recently, now is the time.
Why Do Property Values Need to Be Updated?
Commercial property insurance is designed to help pay the cost to repair or rebuild your building after a covered loss. However, insurance limits are often based on estimated replacement costs established years ago.
As construction costs rise, those older valuations may no longer reflect reality.
When property values are outdated, businesses risk being underinsured, which can lead to unexpected out-of-pocket expenses after a claim.
Here are three reasons every business owner should review their property values regularly.
1. Construction Costs Continue to Rise
The cost of rebuilding a commercial property today is significantly different than it was just a few years ago.
Building materials such as steel, concrete, lumber, roofing materials, electrical components, and HVAC systems have experienced substantial price increases. At the same time, labor shortages across many skilled trades have driven labor costs higher.
Example:
A manufacturing facility insured for $2 million in 2020 may now cost $2.6 million or more to rebuild due to increased material and labor expenses. If a total loss occurs, the business could face a major coverage shortfall.
Regular property valuations help ensure insurance limits keep pace with changing market conditions.
2. Underinsurance Can Create Costly Gaps
Many commercial property policies include coinsurance provisions, which require businesses to insure their property to a certain percentage of its replacement value.
If a building is significantly underinsured, the policyholder may not only face a shortage during a total loss, they may also receive reduced claim payments on partial losses.
Example:
A retail building with a true replacement value of $1 million is insured for only $700,000. After a severe storm causes $200,000 in damage, the insurance company may apply a coinsurance penalty because the property was not adequately insured.
The result? The business owner could be responsible for a larger portion of repair costs than expected.
Accurate property values help reduce the risk of unpleasant surprises when claims occur.
3. Business Growth and Improvements May Change Your Exposure
Property values aren’t affected by inflation alone.
Many businesses have expanded operations, renovated facilities, upgraded equipment, or added improvements over the past few years. These investments can increase the replacement cost of the property and should be reflected in insurance coverage.
Example:
A professional office building undergoes a major renovation that includes upgraded finishes, technology infrastructure, and custom improvements. While the building’s square footage remains the same, the cost to replace those improvements has increased significantly.
Without updating the property’s valuation, those investments may not be fully protected.
Regular reviews ensure your insurance program evolves alongside your business.
Frequently Asked Question: How Often Should Commercial Property Values Be Reviewed?
Most insurance professionals recommend reviewing property values annually, particularly during policy renewal periods.
Businesses should also consider updating valuations whenever they:
- Complete major renovations or additions
- Purchase new buildings
- Upgrade equipment or building systems
- Experience significant changes in construction costs within their industry
- Expand operations
A proactive review can help identify potential gaps before a loss occurs.
Protect Your Business with Accurate Property Values
The commercial insurance market continues to evolve, and rising construction costs remain a major concern for business owners. An outdated property valuation can leave your business exposed to underinsurance, coinsurance penalties, and unexpected financial burdens following a claim.
At Hertvik Insurance Group, we help businesses evaluate their property values and insurance programs to ensure coverage aligns with today’s rebuilding costs, not yesterday’s estimates.
If you have questions about your commercial property insurance or would like a coverage review, contact Hertvik Insurance Group today. Our team is here to help you protect what you’ve worked so hard to build.