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Can Your Insurance Keep Up With Inflation?

By December 13, 2022January 3rd, 2023Millers News

Your property insurance policy should help cover repair, replacement, and rebuilding costs when a covered event results in damages or loss. But during a time when inflation has prices for goods and services rising by staggering margins, how can you be sure your policy gives you adequate coverage? Now would be a great time to review your policy limits with your insurance agent.

Rising inflation has caused prices to climb sharply in recent months. Since June 2019, the consumer price index has shot up by almost 16% for everyday goods and services, and you’ve probably been feeling the pinch. But it’s not just you. Construction companies are struggling, too, as material and labor costs have skyrocketed. 

If your policy hasn’t kept up with these price increases, it may not fully cover the costs to repair or rebuild your rental property investment after a covered event. Here’s what you should know.

How Has Inflation Impacted the Construction Industry?

With supply chain interruptions, backlogs of orders, and construction labor shortages, the construction industry has had its feet to the fire since the early stages of the pandemic. From June 2019 to March 2022, the producer price index for inputs to residential construction (a.k.a., the average cost of materials used for non-commercial construction) increased by a startling 39%.

Some of the most used residential construction materials experienced similar or greater increases over the same time period, including:

  • Softwood lumber: 162% increase
  • Steel products: 71% increase
  • Gypsum products (used in drywall, ready-mix concrete, and plaster): 33% increase

According to a recent release from the National Association of Home Builders (NAHB), some material prices showed slight decreases for September, including softwood lumber and steel products. However, prices for materials like gypsum products and ready-mix concrete are still on the rise, with no signs of slowing.

CBRE, the world’s largest commercial real estate services and investment firm, predicts that some construction costs may stabilize or decrease soon, but several will remain volatile due to the challenges mentioned above, particularly global construction labor and component shortages.

In other words, the factors driving inflation in construction are unlikely to disappear anytime soon.

What Does This Mean for Your Property Insurance Policy?

To better understand how this affects you and your rental property insurance, it’s helpful to examine how the cost to build a house has escalated since 2019.

In 2020, the NAHB released a Cost of Constructing a Home report that revealed average expenses for new builds in 2019. For construction alone, the total cost was $296,652 for a roughly 2,600-square-foot structure, which averages out to around $114.10 per square foot. The most significant portion of this cost was for interior finishes, such as cabinetry, flooring, appliances, drywall, and trim – all items made from materials seeing rising costs.

The NAHB hasn’t released a Cost of Constructing a Home report since 2020, but Forbes offers a reliable estimate for current costs. According to Forbes’ research, the average construction cost per square foot is now roughly $150. For a 2,600-square-foot home, the total construction price would be a grisly $390,000 – a 31.5% increase.

So how does this affect your property insurance? Imagine that, in 2019, the cost to rebuild your property was estimated at $300,000, so you purchased an insurance policy that offers up to $320,000 in benefits, just to be safe. In May 2022, an electrical short causes a fire that renders the property a total loss. 

With a 31.5% increase since then, it would cost roughly $394,500 to rebuild – $74,500 more than your policy will pay. You’re now faced with the choice of rebuilding a smaller, less impressive property within your budget or acquiring outside financing to complete the project.

What Can You Do to Make Sure You Have Enough Coverage?

To protect your finances and rental property business, you should meet with your insurance agent to discuss insuring your property to value. This means that your policy limits are high enough to cover the total cost to rebuild your property if it’s destroyed by a covered event, like a fire or storm. 

Your insurance agent may request that an appraiser or other expert inspect your property to provide a quote for the cost to rebuild. Once this estimate is acquired, your agent should work with you to determine how much you should actually insure the property for, accounting for the possibility of future inflation. Forbes also recommends planning for a 15% contingency fund to help cover any unexpected expenses or obstacles that could come up during construction. 

Your agent should work with you to agree on coverage limits that are sufficient and within your budget. 

Protect Your Property Rental Business

Your family and your future likely both depend on the income from your rental property investment, whether you rent out a duplex or own a small apartment complex. Insuring your property to the full amount it would cost to rebuild it is the best way to protect your rental property investment, and inflation should be taken into account when considering different policy limits. 

At Millers Mutual, we take pride in protecting rental property owners’ finances, futures, and families. Speak with your agent, visit us at, or call us at 800-745-4555 to make sure your property insurance coverage is enough.