How Rising Construction Costs Can Affect Your Farm or Commercial Property Insurance
Material prices, labour costs, supply chain delays, and increased demand for construction have all contributed to higher rebuild costs in Ontario. As these costs change, it becomes more important to review your insurance limits and make sure your coverage still matches the true value of your property.
This is especially important for property insurance policies that include a co-insurance clause. If your property is underinsured, you may receive a reduced claim payment, even if the damage is only partial.
Quick Answer: Why This Matters
Rising construction costs can leave property owners underinsured if their insurance limits are based on outdated rebuild values.
If your home, farm, or commercial building costs more to repair or rebuild today than it did when your policy was last reviewed, your current coverage may not be enough after a loss.
Reviewing your replacement cost limits can help reduce the risk of coverage gaps, co-insurance penalties, and unexpected out-of-pocket costs.
What Is Replacement Cost in Insurance?
Replacement cost is the estimated cost to repair or rebuild a property using similar materials and quality. It is different from market value, purchase price, or tax assessment value.
A property’s market value is based on what someone may pay for it. Replacement cost is based on what it may cost to rebuild the structure after a covered loss.
As construction costs rise, replacement cost values may increase too. This is why it is important to review your insurance limits regularly. A building can be properly insured one year and become underinsured later if rebuild costs increase.
Here’s How a Co-Insurance Penalty Can Affect a Claim
Let’s say your building has a replacement value of $100,000. Your policy includes an 80% co-insurance clause, which means the building should be insured for at least $80,000.
If you only insure the building for $60,000 and a fire causes $10,000 in damage, your claim payment may be reduced because the building was not insured to the required amount.
$60,000 ÷ $80,000 × $10,000 = $7,500
In this example, the policyholder may receive $7,500 before any applicable deductible, instead of the full $10,000 loss amount. The remaining amount may become an out-of-pocket cost.
What Property Owners Should Review
If construction costs have changed, your insurance policy may need a closer look. Important areas to review include:
- Building limits: Do your limits reflect the current cost to rebuild?
- Detached structures: Have you added or changed garages, sheds, barns, workshops, or storage buildings?
- Renovations: Have you upgraded finishes, expanded square footage, or completed major improvements?
- Equipment and contents: Have tools, machinery, inventory, or business property increased in value?
- Business interruption coverage: Would your current limit support your business if repairs took longer than expected?
- Bylaw or code upgrades: Would rebuilding require updates to meet current municipal or building code requirements?
Rising construction costs can increase the amount needed to repair or rebuild a property. If your insurance limits are based on outdated rebuild values, your policy may not provide enough coverage after a loss.
If your building is underinsured, your claim payment may be limited by your policy limit or reduced by a co-insurance penalty. This can leave you responsible for part of the repair or rebuild cost.
No. Market value is what a property may sell for. Replacement cost is the estimated cost to rebuild or repair the structure. These amounts are not always the same.
You should review your property insurance limits at least once a year, and any time you renovate, add a structure, buy equipment, or notice major changes in construction costs.
Homeowners, farm owners, commercial property owners, contractors, landlords, and business owners should review their limits if they have buildings, equipment, inventory, tools, or other property that would need to be repaired or replaced after a loss.
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Inflation Guard Endorsements
If you are worried about the rising costs for property and project limits over time, an inflation guard endorsement can help your coverage better reflect changing construction costs, material prices, and rebuild values in your area.
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