Inflation is driving up the cost to rebuild, repair, or replace business property, but many small business owners haven’t updated their insurance coverage to keep pace. This gap can leave them underinsured and vulnerable if damage occurs.
Prices for key construction materials like steel and aluminum have jumped by more than 13% and 22% over the past year, respectively. Lumber costs have also risen sharply. Along with labor shortages and supply chain problems, these factors are pushing replacement costs for buildings, equipment, and inventory much higher.
The main issue is that many businesses still carry insurance based on outdated property values. Patti Gundlach, a commercial lines underwriting manager at Central Insurance, says small business owners often assume their policies’ built-in inflation adjustments—usually around 5% annually for buildings—are enough. But these automatic increases usually fall short of keeping up with today’s true rebuilding costs.
Another common misconception is confusing market value with replacement cost. Market value reflects what the property might sell for, factoring in land value and demand, while replacement cost is what it would actually cost to rebuild from scratch. These two numbers can be very different.
To avoid surprises, Gundlach recommends routine property evaluations, sometimes called insurance-to-value reviews. These check today’s costs for materials, labor, and location-specific factors like construction type, sprinkler systems, and internal finishes. Such evaluations also highlight if business personal property, like equipment and inventory, is undervalued.
It’s important for businesses to review these values annually or at least every two years—especially after major changes like buying new equipment, expanding, or facing rising operating costs. Delays in updating coverage can leave a business with significant financial gaps if a loss occurs.
When insurance limits don’t match actual rebuilding costs, businesses may have to cover the difference themselves. That can be devastating, making it hard to rebuild, restock, or pay employees after a disaster. Additional expenses, such as meeting new building codes or ADA requirements, can further increase costs if not accounted for.
Central Insurance addresses these risks through a team approach that involves agents, underwriters, and loss control specialists who work closely with clients. Loss control experts visit sites to spot discrepancies and suggest adjustments that reflect today’s realities. This collaboration helps businesses avoid underinsurance and also prevents overinsurance, which can lead to higher premiums.
Gundlach stresses that routine evaluations are more than paperwork—they’re a practical way to protect businesses from the impact of inflation. She urges owners not to wait until a claim happens to find out their insurance falls short.
Small business owners can reach out to their local independent Central Insurance agent to discuss their coverage and make sure it matches current costs. Staying up to date now can save a lot of trouble later when businesses face unexpected losses.