Insuring farm buildings during lumber price increase
Emerging from COVID-19, the building material marketplace — especially lumber — saw prices skyrocket and became the poster child for pricing volatility resulting from supply chain disruptions.
But volatility in construction costs hasn’t been limited to lumber. And the drivers of skyrocketing building material costs weren’t limited to the pandemic. The market has been volatile over the last 18 months from factors like high demand, low interest rates, strong farm incomes and labor shortages.
Such volatility in construction costs is a call for making sure you have adequate insurance coverage for your farm buildings. Consider these options:
Inflation guard insurance
Inflation guard is an optional coverage endorsement. It automatically increases your building limits by a specified percentage throughout the policy term. Three percent is a very common percentage utilized in an inflation guard endorsement. The endorsement protects you from inflation costs if you have to replace a lost building.
“Say you insure a pole barn at $100,000 and add an inflation guard endorsement with a three-percent rate of inflation. You would accrue $3,000 in additional limits throughout the course of the policy year,” said Nationwide Risk Management Property Engineer Ryan Michalek.
Since the rise of COVID-19, inflation guard has sometimes been insufficient. It can’t always keep pace with changing construction costs. That means policyholders may find themselves with inadequate coverage limits after a loss of a farm building, even with the additional coverage. Keep an eye on building material costs and your coverage levels so you’re covered if you have to unexpectedly replace or repair a building.
Blanket limit insurance coverage
Another tool available to manage construction cost volatility is the use of blanket limits. Blanket limit coverage combines all building values at a location. Then, it provides this as a single limit available to pay for any loss at that site.
“If you have two buildings on a farm, one worth $50,000 and the other worth $100,000, blanket limit coverage gives you $150,000 to pay for replacing those buildings,” Michalek said.
Blanket limit coverage also has limitations. As a coinsurance policy provision, it requires policyholders to estimate construction costs of covered buildings to avoid claims penalties. And while blanket limit coverage protects single building losses, it can leave you underinsured for catastrophic site-wide losses like those caused by a tornado or wildfire.
“Blanket coverage is a good tool to manage construction cost volatility. But a diligent effort must still be made to estimate construction costs to a high degree of precision,” Michalek said.
Coordinate building construction costs and coverage
In volatile times, make sure you have adequate coverage limits to protect your farm buildings. Ask your local construction contractor for reconstruction cost estimates. Then, coordinate these values with your insurance agent to adjust your property policy coverage limits accordingly.