{"id":900605,"date":"2022-11-17T15:01:29","date_gmt":"2022-11-17T22:01:29","guid":{"rendered":"https:\/\/www.myconstructionexpert.com\/blog\/?p=900605"},"modified":"2022-11-17T15:01:54","modified_gmt":"2022-11-17T22:01:54","slug":"replacement-cost-skyrocketing","status":"publish","type":"post","link":"https:\/\/www.myconstructionexpert.com\/blog\/replacement-cost-skyrocketing\/","title":{"rendered":"Insurance Limits, Inflation, and Skyrocketing Replacement Costs"},"content":{"rendered":"\n

Hannah Albion, Richard Morehouse and Jon Pinney | Kohrman Jackson & Krantz<\/a><\/p>\n\n\n\n

Unexpected\u00a0inflation\u00a0and increasing replacement costs could combine to present an unpleasant surprise to your expectations for property insurance coverage in a time of need. Many tend to think of real estate properties as stable fixed assets, well-positioned against many risks. However, for improved properties covered by replacement cost policies<\/a>, one important question to ask and find out answers to is whether your property has adequate\u00a0insurance limits\u00a0in an environment of\u00a0increasing construction costs.<\/p>\n\n\n\n

SINGLE FAMILY HOME CONSTRUCTION COST INFLATION<\/h5>\n\n\n\n

Construction costs for single family residential homes recently experienced significant increases nationally. The national median per square foot pricing for single family detached homes in 2021\u00a0increased 21%\u00a0according to the National Association of Home Builders (NAHB) in its review of recent Survey of Construction Data. According to the NAHB:<\/p>\n\n\n\n

\u201cMedian sale and contract prices per square foot of floor area went up across all US regions, undoubtedly, reflecting skyrocketing building materials prices and fast rising labor costs that pummeled home building in 2021.\u201d<\/p><\/blockquote>\n\n\n\n

This data suggests that there may be a sizeable gap between market values or purchase prices, even for homes constructed in the last two years and replacement cost values used for insurance purposes.<\/p>\n\n\n\n

COMMERCIAL COST INFLATION IS NOT GOING AWAY<\/h5>\n\n\n\n

Commercial construction costs have also increased significantly, but to a lesser extent. Turner Construction Company\u2019s Third Quarter 2022\u00a0Building Cost Index\u00a0reports an 8.62% increase in non-residential construction costs from the third quarter of 2021. Construction industry inflation is not in an asset manager\u2019s rear view mirror. Construction cost increases may moderate in the near term, but the data suggests that inflationary pressures are not dissipating any time soon.\u00a0Labor and supply chain issues\u00a0are still present. According to\u00a0Dodge Data & Analytics,\u00a0the number of nonresidential projects in planning stages is up 28% from October 2021 in spite of the Federal Reserve\u2019s 2022\u00a0campaign of interest rate hikes.<\/p>\n\n\n\n

BEWARE OF GAPS BETWEEN VALUE AND REPLACEMENT COST<\/h5>\n\n\n\n

Replacement cost analysis for insurance is particularly critical in a time of decreasing property values as the potential for significant gaps between commercial property market values and replacement cost values emerges. Notwithstanding the significant construction cost inflation being experienced today, commercial property values have decreased by 13% year to date in 2022, according to Green Street Advisors\u00a0Commercial Property Price Index. Despite national trends, the answer to the question of market value can change significantly from market to market, neighborhood to neighborhood and property to property based on many varying factors. Nevertheless, the disconnect between insurance coverage limits and property valuations is a huge issue, according to Oswald Companies Vice President Bryan Williams. In the current environment, commercial builders\u2019 risk underwriters are focusing more intently on coverage specifications and insuring contingencies, as well as hard costs for new construction. Also, escalation clauses ranging from 5% to 10% are being incorporated into policies.<\/p>\n\n\n\n

PROVIDING INFORMATION IS ESSENTIAL TO APPROPRIATELY SIZE COVERAGE<\/h5>\n\n\n\n

In working with insurers to determine the best coverage at the most competitive terms, information is critical. Working with a checklist appropriate to a property\u2019s particular circumstances can be beneficial for both the insured and the insurer. The following is an underwriting information needs checklist for commercial builders risk coverage courtesy of Oswald Companies:<\/p>\n\n\n\n

UNDERWRITING INFORMATION REQUIREMENTS \u2013 WHAT DOES A CUSTOMER NEED TO PROVIDE?<\/h5>\n\n\n\n