Impacts of Increased Costs

BY MATT ARRUDA

the value you were insured at and the value of a similar unit in the current marketplace. While we always recommend that contractors remain diligent and regularly review these values with their brokers - it is more important now than ever before to maintain these updates.

I HAVE A COURSE OF CONSTRUCTION (BUILDER’S RISK) POLICY IN PLACE FOR A PROJECT I AM CARRYING OUT. WHAT HAPPENS WHEN THE COST OF CONSTRUCTION INCREASES OVER THE BUILD TIME?

Post-pandemic, the effects of global supply chain disruptions, accelerating inflation as well as ongoing labour shortages have created an extremely challenging environment for businesses across all industries.

All those in construction have faced dramatic surges in costs over the pandemic and there continues to be upward pressure on equipment, materials and labour prices. As risk advisors dedicated to this industry, many of our clients have come to us with questions and concerns over the past six to 12 months on the impact of these increases on the insurance they require.

Here are a couple of the most common questions we have been addressing and what you should know about the values you report to your insurer.

MY MOBILE PIECES OF EQUIPMENT ARE OLDER AND MY POLICY VALUES THEM AT ACTUAL CASH VALUE — WHAT DOES THAT MEAN?

In the past, equipment values would be depreciated year over year, allowing for premium reductions due to how insurance companies would determine how claims are paid on said pieces of equipment. However, the reality that many construction businesses are facing now is that similar to the current climate for used vehicles, shortages are resulting in pieces of construction equipment appreciating in value even when they are older and have substantial hours of usage accumulated on them.

These new circumstances and the required change in expectations among most contractors (and insurance brokers) have caused some potential issues with contractor’s equipment schedules and how values are being reported. Insurers would typically pay you based on the “market value” of a similar piece of equipment (based on model year, hours on the unit, attachments, etc). When searching the used marketplace, a unit you had once valued at a certain amount may have actually increased by 5 per cent, 10 per cent, or even 50 per cent, in cases of highly specialized pieces.

If you are underinsured on those pieces of equipment, the insurer will apply a co-insurance penalty in the event of a claim, which typically means that you share a portion of the loss with the insurer. Those amounts will vary depending on the percentage of the penalty being imposed and how large of a discrepancy there is between

The short answer is that you should be updating your insurance carrier and increasing policy limits where appropriate as soon as possible. Unfortunately, sometimes the potential for cost increases over the policy term is not factored in. Some policies do include some pre-determined increases of cost either through a set percentage of the policy limit or a flat dollar amount. In our experience, those amounts are not nearly enough in the current landscape with ongoing inflation pressures. With that said, you can minimize the potential for cost overruns by keeping a close eye on project progress and factoring potential issues that could drive costs up, as well as maintaining solid relationships with your subcontractors and suppliers to ensure their projected cost increases are included in your budget. The fallout of being underinsured on your course of construction (builder’s risk) policy could be severe. When you do increase the value on the policy, that premium will be backdated to inception of the policy. This can obviously create some additional problems, when it comes to projections that are already in a cost overrun and now have further costs to absorb.

As you can see, underinsurance can lead to unintended consequences when claims arise and added expenses in an already difficult time for many in the construction industry. To prevent this situation, it is critical that you maintain ongoing communication with your insurance broker, keeping them updated on changes to your operations and fluctuations in values that must be reported. This way, your insurance broker can provide recommendations on any adjustments that should be made to your policies, ensuring you are consistently securing adequate levels of coverage.