Risk of property insurance cover falling short of rebuild costs
Published 19 November 2021
Construction costs are rising so fast that commercial and residential property owners could find their insurance cover falls short of the cost of rebuilding, according to recent reports from both national and international sources.
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.
These increased construction costs are expected to be reflected in higher prices for new homes and renovations, as well as eligible repairs and rebuilds claimed under insurance for property damage or destruction.
Factors driving this trend include increased activity in the Australian construction sector, a 27.3% year on year increase in approvals for new dwellings in 2021 (Australian Bureau of Statistics) and COVID-19 related impacts, including
• 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
• current state infrastructure projects placing stronger demand on materials and skilled trades
• the HomeBuilder grant spurring growth in the residential sector
• new residential building approvals, which peaked in 2020
• health and safety lockdowns further contributing to delays.
What rising construction costs mean for property insurance
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. 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).
These increasing cost margins 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 the policy or didn’t review the sum insured at renewal time, leaving you under insured. If your sum insured for your 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.
Don’t get caught out by your property being under insured
To ensure the sum insured for your 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. At the same time they can check that any regulatory updates to building codes are accounted for and allowance for the costs involved is realistic.
Another important consideration is that the time involved in completing construction is also blowing out due to delays in deliveries of materials, so you need to check that your indemnity period covers an extended time limit for getting the job done.
At Gallagher our specialists can help you recalculate the appropriate sum insured for your 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.