From shortages in the supply chain to covid-related shutdowns to shortages of workers, 2021 saw the highest US inflation in the last 40 years. Inflation affects everything from the price of the (formerly) “dollar pizza” to the value of used cars to raw building materials, which makes these trends particularly relevant for commercial insured with building and business income coverage.
Commercial buildings are generally insured on a replacement cost basis, which is the cost of replacing the building with materials of a similar nature and quality without deduction for depreciation. The annual change in material costs between January 2021and January 2022 is startling *:
- Timmer +15.6%
- Plywood +47.0%
- Commercial steel +21.5%
- Commercial concrete +14.2%
- Structural steel + 34.2%
One of the primary purposes of commercial insurance is to shift the exposure of financial loss to the insurance company, freeing up other funds for investment back to your business. Even if you can not control inflation, you can take care of your financial protection by analyzing your current building boundary and making sure that the boundary is sufficient to replace the building in the unfortunate event of a total loss.
Being underinsured can result in a significant unexpected capital outlay. Some commercial insurances also include co-insurance clauses that require the building limit to be a minimum percentage (usually 80, 90 or 100%) of the entire replacement value. If the current inflation rate is not taken into account, the co-insurance fee can also lead to unforeseen capital expenditures. **
How to better protect your commercial property
Your independent insurance agent and insurance company will have access to valuation resources to confirm the replacement cost of your building. As property prices apply to building values per 100, you are likely to see premium increases in 2022. Some limiting measures to potentially compensate for these increases include higher deductibles, installation of fire protection (ie sprinkler systems, fire alarms at Central Station) for possible interest rate credits and self-insuring smaller structures. A meeting with your insurance agent is also a good opportunity to make sure that you are sufficiently covered for any building standards or legal requirements.
Companies’ income coverage should also be reviewed in the light of the current inflation rate. This important coverage keeps revenues afloat, retains key personnel and retains customers. Inflation can affect sales, salaries and recovery time to repair your property. In addition, there may be a co-insurance clause applicable. Your independent agent can help you evaluate these important exposures to set an adequate income limit for your business. ***
A commercial property insurance policy will help you deal with the many exposures to financial loss. Do not let inflation minimize this protection. Be proactive and schedule a consultation with your agent to review your coverage and ensure you are adequately protected.
About the author
John Carroll is a Commercial Staff Underwriter at Central’s Southeast Regional Office. His responsibilities include insurance and training of commercial real estate. He has over 30 years of experience as a commercial insurer and over 20 of them at Central. John is a graduate of Georgia State University and has earned his title as a Chartered Property Casualty Underwriter (CPCU).
* For CoreLogic 1st Quarter 2022 US National Building Cost Trends letter
** Central Insurance waives construction co-insurance on most of our commercial property insurances.
** Central Insurance waives co-insurance on business income on most of our commercial property insurances.
The information above is of a general nature and your insurance and coverage provided may differ from the examples provided. Please read your entire policy to determine your actual coverage.