Rancho Mesa's Alyssa Burley and Account Executive Kevin Howard discuss the rising reconstruction costs and the impact it’s having on building owners.
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Director/Host: Alyssa Burley
Guest: Kevin Howard
Producer: Megan Lockhart
Producer/Editor: Lauren Stumpf
Music: "Home" by JHS Pedals, “News Room News” by Spence
© Copyright 2024. Rancho Mesa Insurance Services, Inc. All rights reserved.
Transcript
Alyssa Burley: Hi, this is Alyssa Burley with Rancho Mesa's Media Communications and Client Services Department. Thank you for listening to today's top Rancho Mesa news, brought to you by our Safety and Risk Management Network, StudioOne. Welcome back, everyone. My guest is Kevin Howard, partner with Rancho Mesa. He specializes in providing insurance for construction contractors. And today we're going to discuss the rising reconstruction costs and the impact it has on building owners. Kevin, welcome to the show.
Kevin Howard: Good morning, thanks for having me again.
AB: Of course, so now many of your clients own their own buildings or they may even have multiple commercial properties where they need to be concerned with the cost of reconstruction. In the event there is a loss on the building. So what are you seeing is the trend right now for claims that will require physical damage repair or maybe even a complete replacement due to fire or natural disaster incidents that require major reconstruction?
KH: It's a great topic. I think there's this perfect storm of the last five years having to do with a multitude of catastrophic claims. You know, we have everything from wildfires to hurricanes, floods, you name it because of all of these factors, the reconstruction cost has gone up and we haven't really done a public announcement, so to speak, that hey, you should probably double check to see what the replacement value is for your building.
AB: So what should commercial property owners do to ensure that they're adequately insured for a loss on their property? What do you recommend?
KH: It's a great question. I'd say number one is start early. These renewal cycles come annually and meeting 120 days out from your renewal with your insurance agent to really dive deeper into the valuation, the replacement cost, to have that conversation. That's key because there's a lot of fluctuation. There's carriers that are non -renewing or raising their rates. or are saying, "Hey, we believe that your replacement value is X," and if that's a surprise, that can mess with budgets, it can mess with cams, there's so many other factors going into being a commercial building owner right now. If you have a portfolio and you have several tenants, you don't want to be surprised, right?
AB: Right. You don't want to be underinsured if there's a problem.
KH: Well, you don't want to be underinsured, that's in one hand and you don't want to be sitting here under-budgeted for what you're gonna be going forward with on the on the premium, right? So we have a monster 20 % increase. We weren't ready for that, but we already have all of our rents locked in, okay, that's not a good business model. So meet early have that conversation with your insurance agent on “Hey, so we're do you think it's gonna you know what are the trends what are we looking at for the replacement value per square foot for our building.”
AB: Yeah okay so we know that the cost to replace a commercial building is getting more expensive like everything else and in some cases I think you mentioned about 20 % more expensive than a couple years ago so what is contributing to the increase in costs specifically?
KH: What's contributing to the increase is reconstruction costs. So if we look at a couple of factors, we have economy of scale is one. And that would be where if we're planning, you and I, Alyssa, we're gonna, hey, we're gonna build Kevin and Alyssa's monster project, our 700-unit commercial plot. And we have all this time, to buy in bulk and so we're buying everything from the concrete to the copper and now we have it all plotted out. If there's a partial loss, a burn down or a partial burn down, we just lost that economy of scale. We can't, now we're going out and we're getting bids, we gotta work fast. So, with that said, that makes it more expensive than it's ever been because money's more expensive, expensive, gas is more expensive, milk and bread is more expensive, right? Like we're in major inflation mode right now. A second factor would be the demolition and debris removal, you know, removing existing landscape, debris. These are added costs to projects that are, again, more expensive than they've ever been in the last 20 years. And then labor, we're in hyperinflation when it comes to labor with higher wages because of higher costs of living and living in California and medical benefits, we can go on and on and on. So all of these different factors are creating this increase and where replacement values should be and therefore that's the main component of why these premiums are up.
AB: Yeah, and I would assume that like you mentioned the earlier you can figure out where your value is going to be, the better because, you know, it may take some time to look at all of your properties and say, "Okay, this one, this is how much we think that it would cost to rebuild," and, I mean, if you're having to do that on multiple properties, that could take some time.
KH: Absolutely.
AB: So, it sounds like the examples that you mentioned are just some of the reasons why property owners must reevaluate their policy limits, because everything related to reconstructing a commercial property is getting more expensive.
KH: Totally. You're dead on, I agree, and it's never been more important for a building owner to get their statement of values, their SOV, in front of their broker to say, "Hey, let's look at this together. Let's run the cost per square foot. Let's use some different data analytic tools." And every insurance carrier out there that has an appetite for commercial property insurance, they have tools that can help. We're in 2024, there's data analytics across the board that are used to give some advice to say, "Hey, this is where we think it's at." The earlier, the better. If you don't agree, hey, work with your broker and and you know really get down and dirty into what's gonna feel comfortable as far as what that replacement cost is so that you can you know feel feel good, have the budget ready, and understand who the best fit would be. Maybe there's other carriers that might you know have better rates So It's an important time right now for commercial building owners.
AB: Yeah, it would be terrible to start, you know a week or two before your policy expires and try to do all of this. It really has to be done early.
KH: Sounds like a huge headache. It sounds like it's a way to potentially do things too fast and not have a good plan in place and create a gap in insurance.
AB: Yeah, so Kevin, if listeners have questions about their policy limits, what's the best way to get in touch with you?
KH: You can reach me at khoward@ranchomesa.com or my direct line that goes to my cell phone actually at 619-438-6874.
AB: Alright, well Kevin, thank you so much for joining me in StudioOne.
KH: Thank you.
AB: This is Alyssa Burley with Rancho Mesa. Thanks for tuning in to our latest episode produced by StudioOne. For more information, visit us at ranchomesa.com and subscribe to our weekly newsletter.
