Construction Costs and Your Insurance – What You Need to Know

Due to widespread shortages, construction costs have skyrocketed in Canada in the past couple years. If you don’t have plans to build or renovate, you may think these escalating costs won’t impact you; however, if you insure your home or any sort of commercial or residential building, increased construction costs will likely impact your insurance.

What materials are increasing in cost?

• The price of lumber has increased approximately 400% since 2019, partly due to the increasing demand, but also due to the pandemic’s impact on lumber mills and the recent forest fires and the mountain pine beetle problem in BC, which have destroyed millions of trees, reducing the lumber supply in North America. According to an April 2021 CBC news report, two-by-fours are now twice as expensive as they were in 2018.
• There is a drywall shortage in North America, causing major delays and soaring prices.
• The price of steel has increased over 200% in the past six months, and the dramatic increase is expected to continue for another year. Pandemic restrictions slowed steel production, limiting the available supply and increasing the prices on the steel that was available.
• Labour costs have increased as well, and although much of this was offset in the past year by pandemic layoffs, this will likely be a factor as workers return to their jobs.

What does this mean for my business insurance?

Your business insurance will be impacted by these rising costs in a few ways.

1. Co-Insurance – Most business insurance policies include co-insurance clauses, which, essentially, penalize you if you underinsure your property. To ensure you are meeting the requirements of your co-insurance clause and won’t be penalized in the event of a claim, you may need to increase your value of insurance. Have a reconstruction appraisal completed to determine how much it would cost to completely rebuild your building with today’s construction prices. Currently, it is estimated that for every $1,000,000 in construction value, an additional $75,000 – $100,000 will be needed to cover the increase in labour and materials required to reconstruct a building.
2. Business Interruption – A commonly purchased additional coverage for all kinds of organizations, business interruption insurance covers the income you lost when your business operations are interrupted by an insured loss. Due to the current material demands and shortages, the amount of time it will likely take for a building to be repaired or rebuilt following a loss has increased. As such, we recommend extending your indemnity period (the amount of time for which you will be compensated) for interruptions to your normal operations. (For more on business interruption insurance, click here.)

What does this mean for my house insurance?

Rising construction costs mean that your house may need to be insured for a higher limit than it currently is. Home insurance brokers have software that tells them the minimum reconstruction value for a property. They enter all the details of your home into an evaluation tool that provides a limit to which your property must be insured. Insurance companies typically require new evaluators to be completed every few years, and the coverage for your building is updated accordingly.

As you may expect, when construction costs increase and the building value on your policy increases, your home insurance premium also increases.

Your home insurance broker may contact you to discuss an updated reconstruction evaluation of your home, but if they don’t, your home is probably still fully covered. Most home insurance policies include Guaranteed Replacement Cost, which means that your home will be completely rebuilt following an insured claim, even if the cost to rebuild it exceeds the coverage on your policy. (There are some limitations to this, depending on your insurance company – talk to your broker to find our more.) It’s important to still insure your home to the proper limit, so we recommend reviewing your building value with your broker when your policy renews, but don’t worry too much if construction costs rise during your policy term.

For more information on how soaring construction costs may impact you and your insurance policies, talk to your broker.