Reconstruction Costs Have Surged 60% – Is Your Insurance Sufficient?

It’s no secret that reconstruction costs have increased significantly in recent years. However, a recent report shows just how far costs have surged for both commercial and residential reconstruction, and the sheer scope of the issue may come as a surprise. This is a good time to review your insurance coverage and make sure it’s sufficient for today’s costs.

A 60% Increase

Supply chain issues, higher labor costs and more expensive building materials have caused reconstruction costs to surge.

Verisk says that both residential and commercial reconstruction costs increased by around 60% over a 10-year period. Residential reconstruction costs surged by 63.7% between October 2014 and October 2024, while commercial reconstruction costs surged by 58.4% during this period.

This increase outpaces general inflation. According to the CPI Inflation Calculator provided by the U.S. Bureau of Labor Statics, $1 in October 2014 has the equivalent buying power of $1.33 in October 2024, indicating a cumulative inflation rate of approximately 33%. If reconstruction costs had increased at the same rate, a project that would cost $500,000 in 2014 would cost $664,743.32 today – but reconstruction costs have increased much more than this. Based on a 60% increase, a reconstruction project that would cost $500,000 in 2014 would cost around $800,000 today.

It’s not just total losses that are more expensive. Imagine if a storm damages a roof. In 2014 prices, the repairs for this particular roof would cost $10,000. In 2024 prices, the same repairs could cost around $16,000. Many types of claims have been impacted by similar increases. All of these increases add up, and it’s been taking a toll on the insurance industry.

The Impact on Insurance

Insurance companies have been grappling with higher claims costs. There are many factors at play, including natural disasters. However, increased construction costs are certainly part of the challenge. AM Best says the U.S. property and casualty insurance sector experienced a net underwriting loss of approximately $2.6 billion in 2024 – and that’s an improvement over 2023.

For policyholders, rising claims costs have resulted in rising insurance premiums. Although policyholders may not like this, insurers have needed to raise prices to keep up with increasingly expensive claims.

Limits Aren’t Always Keeping Up

Unfortunately, as property values and reconstruction costs rise, many policyholders are not keeping up. According to Fortune, researchers from the University of Colorado at Boulder and the University of Wisconsin-Madison analyzed 5,000 policies and found that 74% were underinsured and 36% were severely underinsured.

Underinsurance can be compounded if your policy includes a co-insurance clause that penalizes policyholders for failing to maintain adequate coverage. For example, if a co-insurance clause requires you to maintain limits that are at least 80% of your property’s value, your claims payouts could be reduced if your property is insured for 79% or less of its value – even if the total claim is lower than your limit. The co-insurance penalty can be a shocking surprise for property owners who don’t realize that they are underinsured.

What Can Policyholders Do?

Rising reconstruction costs are a challenge for both insurers and policyholders. However, there are three important steps you can take.

• Assess your insurance limits. If you haven’t raised your limits in a while, you may be underinsured. Consider whether you need to raise your limits and be mindful of any co-insurance clauses that might apply a penalty for being underinsured.
• Check whether you have guaranteed replacement cost coverage. Insurance claims payouts can be calculated in different ways depending on the policy terms. A policy that provides actual cash value will take depreciation into account when calculating claims payments. As a result, the claims payment may not be large enough to cover replacement or reconstruction. A policy that provides replacement cost coverage will calculate the payout based on the cost to repair or replace the property, up to the policy level. A policy with guaranteed replacement cost value will pay the full price to repair or replace the property even if it exceeds the policy limit. This is important since construction costs can increase mid-year, especially after a widespread natural disaster. However, the policyholder will still need to maintain adequate coverage.
• Make informed decisions. Ask your agent to explain the limits and terms they’re quoting. If an agent offers you a surprisingly low property insurance quote, verify that you would have the coverage you need if you had to rebuild.

Do you have sufficient property insurance coverage in light of rising reconstruction costs? Heffernan Insurance Brokers can help you review your current coverage and determine whether more coverage is needed. Contact us.