Inflation has hardly been out of the news in the last year, with rising prices affecting everything from household bills to costs for small businesses. A new report from Global Risk Consultants Corp shines the spotlight on another impact of rising prices: insurance coverage gaps.

Annual inflation, as measured by consumer prices index (CPI), remained above 10% in March 2023, according to official figures from the Office for National Statistics (ONS). CPI has been above 9% every month since April 2022 and in double figures since September.

After so many months of runaway price rises, the report notes that some companies are now unintentionally underreporting property and equipment valuations. It is understandable that this is happening – but the effects could be severe.

After experiencing losses from events like wildfires, hurricanes or accidents, some companies making insurance claims are receiving insufficient payouts to cover the cost of rebuilding or replacement. It is crucial therefore for companies to understand how costs are calculated and make accurate estimates.

The price of construction materials rose 10.1% from November 2021 to November 2022. Paint (+26.3%), wallboard (+18.0%), insulation (+14.3%) and roofing materials (+12.5%) have all soared, leading to subcontractors raising prices to keep up.

Roofers now cost 20.8% more while plumbers (+15%), electrical contractors (+13.8%) and concreate contractors (+10.9%) have all increased prices too.

Even before the exceptional inflationary pressures of the past year, companies needed to be aware that the relevant figure for insurers is the cost of labour and materials to repair damage rather than a property’s market value or acquisition cost.

In times of rising prices, this becomes increasingly important. The cost to rebuild or replace damaged buildings can now end up higher even than the property’s market value, with the difference between reported and actual values leading to coverage gaps, a serious risk for companies.

Construction companies have been especially prone to rising costs in the last two years, the report notes. In response to these inflationary effects and the increase of underinsured firms, underwriters are now asking for more data on how companies have determined insurance asset valuations.

When there are mismatches with actual values, companies may not be adequately covered for catastrophes. David Rix, global sales manager at Global Risk Consultants, commented, “Companies must defend their values because underwriters are now requiring more data on how they determine asset valuations. A lot of companies aren’t prepared for that, meaning claims won’t pay for rebuilding or replacement costs.”

Insurance coverage gaps become a key consideration in an inflationary environment. At Focus, we’re always here to help our brokers with the challenges that they and their clients are facing. To chat with us about our range of bespoke construction products, please call us on 0345 345 0777 or email sales@focus-insurance.com.