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Rebuilding Costs Are Rising: Is Your Insurance Keeping Up?

March 19, 2025

Rebuilding Cost Considerations: How the Market Influences Your Insurance Coverage

Over the past decade, reconstruction costs for both residential and commercial properties have increased significantly. A ten-year analysis from October 2014 to October 2024 highlights the impact of rising material and labor costs on the rebuilding process. Understanding these cost trends is essential when evaluating home and commercial property insurance coverage.

The Rising Cost of Rebuilding

Between October 2014 and October 2024, residential reconstruction costs rose by 63.7%, while commercial costs increased by 58.4%. Over the past five years, annual cost growth nearly doubled, averaging around 7%. Lumber prices saw a particularly sharp rise, climbing 43.8% since 2014, with the most dramatic spike occurring in recent years due to supply chain disruptions and demand fluctuations.

The Impact of Market Forces on Insurance Coverage

A key takeaway from this trend is the effect of rising reconstruction costs on insurance policies. As the price of rebuilding increases, insurance premiums may rise to account for higher claim payouts. Without adequate coverage, property owners may face significant out-of-pocket expenses when rebuilding after a covered loss.

A home’s Replacement Cost value (RCV) is the estimated cost to rebuild the home at current market prices. Unlike market value, RCV does not include land value but considers factors such as:

  • Square footage and structural features
  • Local construction costs, including labor and materials
  • Building codes and compliance requirements
  • Home improvements

Since inflation and building costs fluctuate, reviewing RCV annually is crucial to ensuring adequate coverage. Many insurers adjust policy limits automatically based on updated construction costs, but homeowners should verify their coverage is sufficient.

Consequences of Insufficient Replacement Cost Coverage

If an insurance policy does not cover the full rebuild cost, homeowners must either pay the difference or build a smaller or less expensive home. For example, if a homeowner has $400,000 in dwelling coverage but rebuilding costs rise to $475,000, they must cover the $75,000 gap themselves or adjust their reconstruction plans.

To mitigate these risks, policyholders can explore options such as:

  • Extended replacement cost coverage, which increases the dwelling limit by a set percentage (e.g., 30%).
  • Guaranteed replacement cost coverage, which covers the full rebuilding cost regardless of price increases.
  • Inflation adjustment coverage, which automatically updates policy limits based on market trends.

Key Steps for Homeowners

To ensure sufficient coverage, homeowners should:

  • Review their policy to confirm the dwelling coverage amount aligns with current rebuilding costs.
  • Consult their Robertson Ryan Insurance Agent to evaluate their insurance-to-value coverage.
  • Assess temporary housing provisions, considering that home rebuilds can take years.

The Role of Import Tariffs on Construction Costs

Threatened or imposed tariffs can also play a role in rising reconstruction costs. Essential materials like softwood lumber (primarily from Canada) and gypsum (from Mexico) are subject to new, additional import duties, increasing their cost. In 2023:

  • 70% of the $8.5 billion in imported sawmill and wood products came from Canada, subjected at the time to a 14.5% tariff.
  • 71% of the $456 million in imported lime and gypsum products originated from Mexico.

Additionally, raw materials such as steel and aluminum, often sourced from China, face tariffs that contribute to increased construction costs. Estimates suggest these tariffs could raise costs by $3 billion to $4 billion across the construction industry.

Looking Ahead

While market fluctuations and policy changes affect reconstruction costs, property owners can take proactive steps to ensure they are adequately covered. Understanding Replacement Cost Value, reviewing policies regularly with a Robertson Ryan Insurance Agent, and considering additional coverage options can provide financial security in the event of a disaster. By staying informed and working with your insurance professionals, homeowners and commercial property owners can navigate the evolving landscape of rebuilding costs with confidence.

*Please note that we rely on independent sources, and recommend conducting further research or to seek guidance from a qualified industry professional, legal counsel, or licensed insurance agent as appropriate for your needs. These blog posts are intended for general informational purposes only.