In the commercial property insurance space, rising inflation increases the risk of undervaluing property. A rise in building costs due to factors such as labor shortages, worker wage growth, supply chain disruptions and raw material price increases can increase the severity of a property insurance claim and create potential underinsurance issues for the policyholder.
One way insureds can counter the negative effects of inflation is by adding an inflation guard endorsement to their commercial property policy. This article explains the risk of property undervaluation and how an inflation guard can help insureds mitigate the potentially costly effects of underinsuring property due to inflation.
Coinsurance and the Risk of Property Undervaluation
Coinsurance refers to a provision in some commercial property insurance policies that gives an insurance company the right to reduce the amount of a claim payment if the amount of insurance purchased is inadequate. Due to this policy language, policyholders who are underinsured at the time of a partial or total loss may have to pay high out-of-pocket costs to return to normal operations. Essentially, inadequate coverage could result in a coinsurance penalty for a company’s buildings and business personal property.
Inflation Guard Endorsement
One potential solution to the risk of property undervaluation is an inflation guard. Adding an inflation guard endorsement to an existing commercial property policy can protect insureds by providing automatic, periodic increases in the amount of property insurance coverage.
The purpose of an inflation guard endorsement is to assist the insured in meeting coinsurance requirements and to protect against underinsurance caused by rising building costs. It may also lessen the need for constant monitoring of property insurance limits. The inflation guard endorsement option is activated by an entry on the declarations page of a percentage increase in limit of insurance applicable for each year.
Businesses must take a proactive approach when it comes to their risk management efforts. Having the proper insurance policies in place can help insureds mitigate risks, such as the undervaluation of property due to inflation. For more guidance, contact us today.