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Insurance Implications of Rising Building Costs

By Joel Lehman, vice president, property underwriting at The Hanover Insurance Group, Inc. | June 14, 2021

This post is part of a series sponsored by The Hanover Insurance Group.

The rising cost of building materials is quickly outpacing inflation rates, and the high demand for qualified workers and widespread global supply chain pressure, are only adding to the increasing costs, creating new risks for business customers who may need to rebuild after a property loss. Fortunately, independent agents are well positioned to help educate their clients on important insurance coverage requirements and considerations.

Increasing costs

Total reconstruction costs increased 8.1% countrywide, on average, between January 2020 and January 2021, according to Verisk’s (ISO) most recent 360Value Quarterly Cost Update, rising from lows of about 6% to almost as much as 12%, depending on the state. Costs for materials rose by 15.2%, with lumber costs alone posting an 85% jump.

At the same time, labor costs have grown 3.8%, down from almost 8% in January, driven in part by a shortage of workers. This is especially true for areas that were hard hit by winter and spring storms where materials and an appropriate qualified workforce were in even higher demand. The scarcity of materials has been exacerbated by pressures on the global supply chain. One recent example came with the Suez Canal blockage, where many materials were delayed in reaching their destinations. These and other pressures on the international supply chain may impact the movement of equipment and materials for months to come.

Insurance considerations

Delays. With shortages in workers and more costly materials, many businesses are experiencing delays in post-loss recovery, putting their businesses at risk of exceeding policy limitations.

Unexpected costs. Given the spike in costs, total building, equipment and contents replacements costs may be underestimated, which may result in a business being underinsured or subject to unwanted coinsurance penalties.

Business income limits: With materials and labor delays, it is conceivable that recovery times will be stretched, possibly beyond the period of indemnity and/or the extended period of indemnity, if applicable. This could cause property policy time element limitations to be exceed in some cases.


The right insurance solution can help protect clients against unexpected financial stress in the event of a loss. Independent agents can guide their clients toward coverage that is appropriate for their unique needs, by taking the following steps:

  1. Initiating proactive conversations: Mid-term meetings with clients can help set up these important discussions well ahead of renewals.
  2. Reevaluate cost estimates: Agents can help clients reevaluate replacement cost estimates for buildings, contents, equipment and business interruption to ensure the appropriate coverage levels are in place.
  3. Review policy terms and conditions: Agents can confirm the right policy limits or sublimits are in place, so clients do not find themselves underinsured and unnecessarily penalized by co-insurance requirements.
  4. Emphasize sourcing alternatives: With the scarcity of materials, agents can remind customers to have back up plans in place to source and procure resources, materials and equipment to help deliver on their commitments.

With current trends expected to continue for the foreseeable future, independent agents can provide their clients with valuable advice and counsel and put an insurance program in place that provides the right level of protection in the event of a damaging property loss.

Topics Trends

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