Rising Building Costs and Insurance: What Every Property Owner Needs to Know

Imagine you own a commercial property in Florida, and a storm causes major roof damage. You file a claim with your insurance company, expecting a full payout to cover repairs. But when you receive the estimate, you realize a serious problem—the cost of materials has increased so much that your coverage no longer accounts for the full price of rebuilding.

This situation is becoming increasingly common. Since 2020, the price of construction materials has risen by an average of 19 percent, making repairs and replacements far more expensive. As a result, commercial property insurance premiums increased by 7.7 percent in the first quarter of 2024 alone.

For business owners, property managers, and investors, this trend presents a dual challenge: higher insurance premiums and a growing risk of being underinsured. If coverage has not been updated to reflect current market conditions, policyholders may be left paying out-of-pocket for property damage, even with an active insurance policy.

Understanding how these cost increases impact insurance policies is critical. This article explains the factors behind rising costs and outlines key steps property owners can take to protect their investments.

What is Commercial Property Insurance, and Why Does Replacement Cost Matter?

Commercial property insurance provides coverage for buildings, equipment, and assets against risks such as fires, storms, and theft. In the event of property damage, the purpose of an insurance policy is to cover the cost of repairs or replacements so that businesses can rebuild without significant financial hardship.

However, insurance policies are based on “replacement cost value” (RCV), which estimates the expense of rebuilding a property using current materials and labor costs. If this estimate is outdated and does not reflect recent price increases, policyholders may be underinsured. This means:

• Coverage limits may not be sufficient to fully replace or repair the property.
• Business owners and property managers may face unexpected out-of-pocket costs.
• Financial vulnerabilities could arise if a disaster occurs and coverage is inadequate.

With material costs continuing to rise, property owners who do not reassess their insurance policies may encounter financial difficulties when attempting to rebuild.

Why Are Insurance Premiums Rising?

The increase in insurance costs is driven by several key factors beyond general inflation.

1. Higher Construction Costs Are Pushing Up Replacement Values

Since insurers determine payouts based on the cost of rebuilding, rising prices for materials such as steel, concrete, and lumber have directly impacted insurance claims. As a result, insurance companies have increased premiums to reflect higher replacement costs.

2. Stronger Storms Are Leading to Larger Claims

Florida and other disaster-prone regions have experienced an increase in extreme weather events, resulting in a higher volume of claims. Each major storm prompts insurers to reassess risk levels, which leads to higher premiums for policyholders.

3. Underinsurance is Creating Financial Gaps

Many policyholders assume their existing coverage will be sufficient to cover the full cost of rebuilding. However, outdated policy limits may leave them underinsured. This issue is not only affecting individual businesses but is also impacting the broader insurance market, contributing to rising costs for all policyholders.

For property owners, the primary risk is not just paying higher premiums but facing unexpected financial gaps if they need to file a claim.

How to Protect Your Property from Rising Costs

1. Review and Adjust Your Policy Annually

• Work with an insurance professional to assess whether coverage limits are still sufficient.
• If replacement costs have increased in your area, adjust coverage before the need to file a claim.
• Consider adding protection clauses that automatically update coverage limits based on market trends.

2. Budget for Rising Construction and Insurance Costs

• Factor higher rebuilding costs into financial planning.
• For those managing multiple properties, review cost trends in different locations, as some areas may experience more significant price fluctuations.
• Use financial planning tools to assess potential increases in premium costs over time.

3. Explore Cost-Effective Construction Options

• Consider alternative materials that are durable yet less expensive than traditional options.
• Work with local suppliers to reduce transportation costs.
• If developing or renovating, explore modular or prefabricated construction methods to lower labor expenses.

By taking a proactive approach, property owners can reduce the financial risks associated with rising material costs and insurance premiums.

Preparing for the Road Ahead

The trend of rising building costs is unlikely to reverse in the near future. Supply chain disruptions, extreme weather events, and inflationary pressures indicate continued price increases.

For property owners, business leaders, and investors, now is the time to act:

• Review current insurance coverage and ensure it reflects real rebuilding costs.
• Plan ahead for higher insurance premiums and out of pocket coverage gaps to avoid financial strain.
• Work with experts who can assist with policy adjustments and risk management.

Waiting until a disaster occurs is not a strategy. Property owners in Florida and other high-risk areas should ensure their insurance policies align with current market conditions to avoid costly coverage gaps.

Need Help with Commercial Insurance?

Understanding whether coverage is sufficient—and how rising building costs affect policies—can be complex.

For assistance with commercial property insurance, policy reviews, or risk management strategies, Ram Risk Group is here to help.

Contact Ram Risk Group today for a consultation with our insurance professionals.

Relevant Resources and Citations

1. Church Mutual® – A stock insurer whose policyholders are members of the parent mutual holding company formed on January 1, 2020. S.I. = a stock insurer.
2. M & G Insurance Agency, Inc. | Rising Material Costs in the Construction Industry and How It Affects Insurance Rates
3. National Association of Home Builders | How Soaring Prices of Building Materials Impact Housing