Are you covered? Inflation’s impact on your insurance
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Canada’s Consumer Price Index hit 6.8% in April 2022, reaching its highest level in over 30 years. Inflation does more than raise the price of the goods that line the shelves of your local grocery store, it also impacts the insured value of your property. How is that possible, seeing as your investment property was built years, perhaps even decades, ago?
Because inflation raises reconstruction value. Reconstruction or replacement value is the cost to replace or rebuild a home to original or similar standards at current material and labour costs within a certain geographical area. So, when reconstruction costs rise, so does the insured value of your property.
When this occurs, the required amount of homeowners insurance will likely increase accordingly. Recently, there has been a rising trend in underinsured claims for both homes and commercial properties. With inflation rates hitting new record levels, it is even more important that you ensure you are adequately covered against a threat (weather event, etc.) that may result in repairs or even an outright rebuild. What can you do to protect yourself? Keep reading.
What Investors Can do to Ensure Adequate Insurance to Cover Increases in Insured Property Value
Speak to an Insurance Broker About Your Current Insured Property Value
If you haven’t completed a home evaluation recently, be sure to speak to your broker today. Keep in mind that insured value increases may arise not just because of inflation’s impact on construction materials, but other factors such as alterations in building codes, labor costs, and more. For these reasons, you should review your property value and your homeowners insurance coverage annually.
As people spent more time at home due to lifestyle changes brought on by the pandemic, home renovations and additions also increased. If you’ve recently made renovations, retrofits, or any upgrade whatsoever, those changes may also significantly increase the value of your investment properties. Contact your broker immediately to notify them of any changes and ensure that you are adequately protected.
Understanding a Co-Insurance Clause
Even if a full rebuild is not required, underinsuring your building is still a significant issue. Even when only a portion of a building is damaged by an insured loss, if your building is not insured to the full replacement value, the insurer will apply a financial penalty against the claim. This is known as a co-insurance clause. For example, if you are only insured for half the replacement value, the insurance company will only pay half of the cost to make repairs and you will need to pay the difference yourself.
Inflation Affects Commercial Properties Too
If you also own commercial property, it is important to understand that the same principles apply to these assets as well. So, remember to re-evaluate all your building values with your broker annually to ensure that you are fully covered.
Chris Westrop is the Vice President of Commercial Lines at Park Insurance. He has 30 years of experience in the commercial insurance business and is a Chartered Insurance Professional with the Insurance Institute of Canada. He is also a REIN member and a regular attendee at many of our programs. Learn more about Chris and the experienced team of Commercial Insurance advisors at Park Insurance. Chris may be reached at (604) 659-3133 or email@example.com.