Persistent inflation has had spillover effects on the insurance that companies use to guard against disaster at their facilities, with higher construction costs making it harder to get coverage and harder to get paid on claims.
Businesses usually insure against events such as fire and hurricanes in one-year cycles, which in a typical economic environment doesn’t pose major difficulties. If a factory would cost $40 million to build in January, it probably will cost slightly more than $40 million to replace in December, if, for example, a wildfire swept through.
But in the current inflationary environment, the cost of rebuilding could be significantly higher, which has caused headaches for businesses and insurers. While broad consumer costs, as measured by the consumer-price index, went up by 6.4% in January from a year earlier, some construction-related costs have gone up much more.
Paint prices, for example, jumped more than 26% from November 2021 to November 2022, according to an analysis released in December by the Associated General Contractors of America, a trade group. The same analysis showed glass got 12% more expensive and roofing materials 13%. The actual roofing contractors themselves cost 21% more to hire. The diesel in their work trucks: 60% more costly.
“Inflation and cost run-ups as a result of supply-chain issues and the pandemic have wreaked havoc,” said Scott Godes, a partner at law firm Barnes & Thornburg LLP who represents companies that try to recover money from insurers. “This is an issue that has impacted insurance claims across the board. Everything is remarkably more expensive.”