How Does the Increase in Cost of Construction Impact Your Insurance?

Posted: 4 years, 7 months ago

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Updated January 2026

Rising Construction Costs: Why Your Insurance Coverage Matters More Than Ever in 2025

By now, most homeowners and business owners are well aware that construction costs remain significantly higher than they were just a few years ago. While prices have stabilized in some areas, material and labor costs are still elevated—and that reality has important implications for your insurance coverage.

Many people recognize rising costs when planning a remodel or new build, but fewer consider how these changes impact insurance valuations, policy limits, and claim outcomes.

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What’s Driving Construction Costs Today?

While the extreme volatility of 2020–2022 has eased, the construction industry has entered a new normal:

• Building materials like lumber, steel, and concrete remain well above pre-2020 pricing

• Skilled labor shortages continue nationwide

• Local code updates and energy-efficiency requirements add to rebuild costs

• Supply chain disruptions still affect timelines and pricing

According to industry groups such as the National Association of Home Builders (NAHB), rebuilding a home or commercial structure today can cost significantly more than it did even five years ago—especially when factoring in labor, permits, and updated building codes. The key takeaway: replacement costs are higher, even when market prices fluctuate.

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The Insurance Impact: Where Gaps Can Appear

Insurance is designed to help you recover after a loss—but only if your coverage reflects today’s reality.

When construction costs rise, several issues can emerge:

• Policy limits may no longer reflect the true cost to rebuild

• Claims payouts may fall short if limits haven’t kept pace

• Outdated valuations can leave policyholders paying out of pocket

• Premiums may increase as carriers adjust for higher claim severity

In short, underinsured properties are one of the most common—and most avoidable—coverage gaps we see today.

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Replacement Cost vs. Actual Cash Value (Why It Matters)

One of the most important policy details to understand is how your property is valued:

• Replacement Cost Coverage helps pay to repair or rebuild using today’s materials and labor, without depreciation.

• Actual Cash Value (ACV) factors in depreciation, often resulting in a significantly lower claim payment.

In a high-cost construction environment, replacement cost coverage is more critical than ever—but only if limits are accurate.

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Coverage Options That Help Address Rising Costs

Depending on your policy and carrier, several endorsements can help protect against increased rebuild expenses:

Ordinance or Law Coverage

Covers additional costs required to rebuild to current building codes, including:

• Demolition of undamaged portions

• Code-required upgrades

• Increased construction costs

This is especially important for older homes and commercial buildings.

Inflation Guard

Automatically increases your coverage limits annually—typically between 2% and 8%—to help keep pace with inflation and rising costs.

Extended Replacement Cost

Common on homeowners policies, this provides an additional buffer (often 25%–50% above policy limits) if rebuilding costs exceed expectations after a loss.

Guaranteed Replacement Cost

Less common and more expensive, this coverage pays whatever it costs to rebuild your home—even if it exceeds policy limits—subject to policy terms.

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Don’t Forget: Liability and Rebuild Costs Go Hand in Hand

Construction costs don’t just affect property coverage—they can also impact liability exposure, especially for contractors and business owners.

Example:
Your crew is working on a commercial remodel and accidentally causes a fire resulting in a total loss. The cost to rebuild the structure exceeds $1,000,000, but your General Liability policy is capped at that amount.

In today’s construction environment, umbrella or excess liability coverage can provide critical additional protection above standard limits.

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Smart Steps to Take in 2025

To stay properly protected, consider the following:

• Review your policy regularly to confirm coverage limits reflect current rebuild costs

• Notify your agent of renovations or upgrades, even if they seem minor

• Work with a local builder to estimate rebuilding costs, not just market value

• Discuss endorsements that address inflation, code upgrades, and extended replacement

• Evaluate liability limits, especially if you work on others’ property

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Final Thoughts

Construction costs may fluctuate, but insurance decisions made today should be based on what it would cost to rebuild tomorrow—not what it cost years ago. A proactive policy review can help prevent surprises, reduce financial stress after a loss, and ensure your coverage works the way it’s intended to.

If you have questions about your current limits or want guidance on adjusting your coverage, the team at Top O’ Michigan Insurance is here to help. Email us Service@TheSpireTeam.com

 

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