Q&A: will your property insurance cover your rebuild costs?
Published 01 March 2022
A combination of factors are driving construction costs up in Australia, making it imperative that property owners check their insurance cover – especially before renewing their policies – because their sums insured may fall well short or the cost of rebuilding if disaster strikes.
Statistical information and modelling back this up. Data analyst CoreLogic’s national measure of residential construction costs showed a 1.4% increase in building costs for the 2021 June quarter, outpacing the 0.8% inflation rate and the 0.4% increase in wages.
As a result of this trend industry reports predict the Sydney, Perth and Brisbane construction markets will record cost hikes of more than 3% by the close of 2023, with yearly increases of 2.5% in Melbourne and Adelaide.
Other sources suggest these predictions may be conservative, due to the even more dramatic increases in the cost of materials. For example, in Sydney prices for steel are reported to have risen 10%, rebar 20% and timber 24% in the last 12 months (Turner & Townsend).
Q: What’s going on in Australia’s building sector?
A: With the HomeBuilder grant spurring growth in the residential sector in 2021 approvals for new dwellings increased by 27.3% year on year (Australian Bureau of Statistics), following on from new residential building approvals, which peaked in 2020.
Added to this are the large scale government infrastructure projects under way in the different states, draining the labour pool of skilled trades to meet the demand of increased activity in the construction sector.
At the same time closures and delays in shipping and deliveries are causing interruptions to deliveries of supplies, limiting the availability of materials and pushing up the costs, resulting in higher prices for business premises, new homes, renovations and insurance claim costs for rebuilds and repairs.
Q: Is the pandemic to blame for pushing up costs?
A: Yes, partly. From the closure of Chinese ports to the availability of containers, COVID-19 related impacts have exacerbated construction sector conditions in Australia.
These impacts include
supply chain delays due to freight disruptions are limiting availability of materials
inflated costs of materials as a result of shortages
border closures restricting access to labour and freight movements
health and safety lockdowns further contributing to delays.
Q: How does this affect my business property insurance?
A: The increasing cost margins in the Australian construction sector mean that the price of repairing or rebuilding if your property is severely damaged is likely to be greater than calculated when you took out your business property damage policy. Similarly if you didn’t review the sum insured at renewal time, you are likely to be under insured.
If your sum insured for your business property isn’t adequate to cover its replacement you will be left to carry the difference between your claim pay-out and the actual price, which could be substantial, considering the rapid increase in construction costs.
Q: What are the key considerations if I do have to rebuild?
A: If your business property is damaged and requires repairs or rebuilding in part or in total in addition to checking that your sum insured covers the construction costs you will need to factor the current conditions into the arrangements you make until they can be completed.
These might include the costs involved with
hired-in facilities and equipment
measures to prevent further degradations.
Q: How can I avoid being left behind by rising construction costs?
A: To ensure the sum insured for your business property’s rebuild value will cover the cost at today’s rates – and tomorrow’s – it’s well worth reviewing your cover with your broker before fire/flood/cyclone/storm season in your area.
Your broker can also assess your risks and any damage prevention measures that you have in place in order to present your insurance needs in a positive way to insurers.
Q: How can an insurance broker help business property owners stay ahead?
A: Your insurance broker can check that any regulatory updates to building codes are accounted for and allowance for the costs involved is realistic. They can also assist by discussing how adjusting your excess can make your premium more affordable and help calculate how much risk you’re in a position to carry. They can also explore whether premium funding arrangements that spread your payments over a year are available.
At Gallagher our specialists can help you recalculate the appropriate sum insured for your business property cover, check that the terms of your policy are current and allow for a realistic time frame.
Remember also, if you’re renewing your insurance a broker review plays a vital role in ensuring you can face the future with confidence.
Gallagher provides insurance, risk management and benefits consulting services for clients in response to both known and unknown risk exposures. When providing analysis and recommendations regarding potential insurance coverage, potential claims and/or operational strategy in response to national emergencies (including health crises), we do so from an insurance and/or risk management perspective.