The following reflects construction market conditions as of 2021. While the coinsurance and coverage-limit principles below remain evergreen, the specific cost drivers discussed (lumber prices, supply chain disruptions) were particular to that period.

Construction costs are rising. This means that projects are becoming more expensive, and that's if everything goes as planned. The surge in building costs also means that insurance coverage limits may need to be raised. If limits are not increased, you might find that you don't have enough coverage if something goes wrong.

Here's a look at why construction costs were rising at the time, how it impacts insurance coverage, and what property owners can do to manage the situation.

How Much Are Building Costs Rising?

The biggest price increases have been seen in lumber costs. The National Association for Home Builders says that lumber prices have surged more than 300% since April 2020. This increase in materials costs pushed the price of a new single-family home up by almost $36,000.

Although lumber prices have seen the most extreme price surges, other costs have gone up, as well. Construction Dive cited an Associated Builders and Contractors analysis showing a 15.6% increase in iron and steel prices between January 2020 and January 2021. These increases set off a domino effect, driving up costs for everything from steel studs to drywall, wall panels, and vinyl siding.

Skilled Labor Shortages Added to the Problem

The construction industry had reported concerns over skilled labor shortages for some time, and those difficulties appeared to be increasing.

The Q1 2021 Commercial Construction Index from the U.S. Chamber of Commerce found that 85% of contractors reported moderate to high difficulty finding skilled workers, an increase of 2% since the fourth quarter of 2020. Additionally, 46% of contractors reported a high degree of concern about whether their workers had adequate skill levels, up 10% from the prior quarter.

Among contractors dealing with skilled labor shortages, 61% reported challenges meeting project schedules, 59% put in higher bids, and 34% turned down work.

This was ultimately an issue of supply and demand. Demand for skilled construction workers was high, and the supply was low, resulting in higher bids and, in some cases, delays, which added further pressure on top of the building materials price increases already underway.

Why Were Building Costs Increasing?

Inflation accounted for some of the price increase, but several other factors contributed to the surge at the time:

• Wildfires: The National Interagency Fire Center reported that wildfires burned more than 10 million acres in 2020, compared to about 4.66 million acres in 2019 and 8.77 million acres in 2018.
• Supply chain issues: In March 2021, the Suez Canal was blocked for six days after a containership became lodged in the waterway. Roughly 12% of global trade passes through the canal each day, so the blockage had a significant impact.
• Port congestion: In April 2021, 21 ships were reported waiting for a berth at the Los Angeles and Long Beach ports, some for weeks.
• Lumber tariffs: The U.S. Chamber of Commerce had suggested doubling the tariff on Canadian lumber, from 9% to 18%.
• COVID-19: 80% of contractors reported project delays tied to the pandemic, and a May 2021 survey found more than 90% of builders experiencing shortages of appliances, framing lumber, and oriented strand board.

What Is a Coinsurance Clause, and How Does It Affect Your Coverage Limits?

A coinsurance clause is a provision in many property insurance policies that penalizes you for being underinsured. If your property is undervalued and you suffer a loss, the insurance payout is reduced by an underreporting penalty, even if your loss is otherwise fully covered under your policy limit.

Between rising materials costs, labor shortages, and supply chain issues, construction projects can cost significantly more to rebuild than they did when a policy was first written. Your property valuation and insurance coverage need to adjust accordingly.

Higher insurance limits may mean higher premiums, and property owners often hesitate to take on that added cost. But failing to raise your limits when rebuilding costs rise can leave you exposed to a much bigger loss than the premium increase would have cost.

All construction projects face risk, including property damage, breach of contract, and bodily injury liability. Appropriate insurance can cover these risks, but only if the limits are high enough. If your coverage hasn't kept pace with rising costs, you may end up covering the difference out of pocket if you ever need to file a claim, and a coinsurance clause can make that gap even larger.

What Should Property Owners Do?

Given how much building costs can fluctuate, and how unpredictably, property owners need to verify that they have up-to-date valuations and the correct level of insurance coverage on an ongoing basis, not just at renewal.

Here at Hotchkiss Insurance, we have a dedicated team to monitor changes in the construction market and make sure you have the correct level of insurance coverage. Contact us to review your commercial and personal property insurance policies.