Summary:  The Covid-19 Pandemic has created numerous challenges across a variety of industries. The insurance industry is no exception. Early on the insurance industry faced issues directly related to the pandemic such as coverage for loss of income and dealing with policy deadlines that could not be met due to nationwide shutdowns. Now, there is a new challenge; a challenge that runs deeper and impacts every person or entity that buys or sells property insurance. This challenge is how to adequately insure property in a market that is seeing substantial and rapid increases in construction costs.

In the beginning of the pandemic, production of many key construction materials, such as lumber, slowed dramatically. At the same time, demand increased. This is based on a combination of events. According to a recent article in Fortune, "At the onset of the pandemic, quarantining Americans set-off a home renovation and DIY boom that is still keeping places like Home Depot busy today. Additionally, low interest rates and tight existing home inventory have more home buyers looking for new construction. Indeed, in December housing starts hit their highest level since 2006."

According to the National Association of Home Builders, lumber prices have increased nearly 250 percent since last spring causing the price of the average single-family home to increase by more than $24,000.00. The dramatic and rapid increase in the cost of materials is impacting all aspects of construction, not just new home building. Based on conversations with numerous insurance restoration contractors, they are struggling to complete repairs for the amounts agreed to in the adjustment process. These factors create a "perfect storm" of potential problems for insureds trying to protect their property.

The Impact of Rapidly Increasing Construction Costs on Insureds

The most obvious and direct impact of increased construction costs on insureds occurs when they have a loss. Construction costs are increasing faster than insurance policies can keep up. Most policies renew annually. Many policies have built-in inflation guards and will increase automatically upon renewal. Some policies even have inflation guards that will pro rate a nominal increase from the date of the inception of the policy up to the date of loss. In normal times, assuming no major changes to the property, these increases are either sufficient to keep up with average increases in construction costs or are actually ahead of inflation, resulting in properties being slightly over-insured. While there is very little downside risk to being over insured, there are significant risks to being underinsured.