The price of everything has skyrocketed since 2020, making record inflation the news of the day. Between rising material costs and supply chain issues, building or renovating anything is a challenge right now. Many property owners have put off renovation and construction projects. But what if you had to rebuild?
Property Damage on the Horizon
Hurricane and wildfire seasons are just part of the cycle of potential risks your property faces. As a landlord, you know that there is always risk, which is why you have insurance. Your Businessowners Policy (BOP) includes coverage for your property to mitigate those risks, whether they are predictable or unforeseeable.
Your BOP is designed to cover the cost of repairing or replacing any portions of the building damaged by insured events. When you bought your policy, the underwriters did a valuation on your property, estimated the cost of replacing the building, and set your premiums. Keeping your coverage up to date and paying your premiums on time can deliver peace of mind that your coverage will support renovation or replacement should your building be unavoidably damaged.
What About Raging Inflation?
Record high inflation is giving everybody something to worry about. The cost to rebuild your rental property will go up over time due to inflation, a natural part of a healthy economy. A standard rate of inflation is factored in by the underwriters of your policy. However, the current rate of inflation is more than double what could normally be expected. High inflation is reflected in the skyrocketing costs of building materials and construction labor.
Between the exorbitant cost and unreliable availability of building materials, you may wisely choose not to undertake any renovation or construction projects right now. But, if your property suffers unexpected damage, you may have no choice but to call a contractor and make the repairs. Will your property insurance be enough to cover replacement costs for your rental property under the current economic conditions?
How Valuation Affects Coverage
The underwriters of your property insurance use the value of your property to calculate the amount of coverage you should need and the cost of your premiums. They also use the property valuation to set policy limits based on their best estimates of what it would cost to rebuild your property if it were a total loss.
Assume your rental property is insured for $850,000. Often, the market value is higher than the insurance value of a property, although with inflation climbing that trend could turn around. The market value is how much you could sell your property for, while the insured value is how much it would cost to rebuild your property.
If your property is a total loss after a devastating storm, your insurance policy would pay out $850,000 to rebuild it. Two years ago, that coverage would give you peace of mind. However, factoring in today’s inflation rate, it might cost you 15% to 30% more than its insured value to rebuild your rental property. That additional cost would become your out-of-pocket expense. You might also have to factor in additional lost revenue due to supply chain issues that could turn a six-month building project into a yearlong event.
How Millers Mutual Can Help
Risk is everywhere, and if your property insurance is based on a building valuation that was done before inflation began its dramatic rise, you face the additional risk of not having enough coverage. To mitigate the additional risk you face at this time of high inflation, Millers Mutual is increasing building valuations for our customers. The valuation increase will affect premiums, but it will also ensure your coverage more closely matches the costs you could face if you need to repair or rebuild your property.
It is everyone’s hope that record high inflation and building material shortages are a temporary condition that will be resolved in time. We will watch the market and plan to remove the added increase to building values when we experience deflation. In the meantime, Millers Mutual remains committed to bringing stability to rental property owners, especially in the face of unprecedented economic conditions that could adversely affect your business.
Millers Mutual is always working to protect our customers from emerging risk. Inflation presents an emerging risk to all property owners. We want to be sure that if disaster strikes, you’re fully covered and can repair or replace the parts of your rental property that are damaged. By increasing the property valuation on all our BOP policies, we are protecting one of your most valuable assets – your income property.