Editor’s note: The following guest editorial was submitted to Repairer Driven News by Alex Whittit, Client Relationship Manager at Intrepid Direct Insurance of Overland Park, Kansas. While this editorial is not directly related to collision repair, we believe it should still prove valuable to the small-business owners and employees who make up much of the industry. Here, he advises shop owners to take into account the effects of inflation when insuring their properties. Intrepid Direct specializes in auto repair garage insurance.

By Alex Whittit

Consumers are back, and are coming back stronger and stronger as the world continues to see glimpses of recovery. Most economic forecasts, whether they originate from the U.S. government or private groups, predict an explosion of spending in quarters to come due to pent-up consumer demand. A recent Deloitte survey estimates consumers saved about $1.6 trillion more than what they would have saved had there been no pandemic – and they are ready to spend it.

Americans are hitting the road again as they head out to their favorite restaurants, hit the gym, or pack up for their family road trip. According to the National Safety Council, the number of miles driven in May 2021 was up 28.7% compared to May 2020 – only down 4.1% compared to May 2019. From January to May of 2021, car crashes resulting in fatalities were up 20% compared to the same time frame 2020, and up 16% compared to 2019. Whether your business slowed or not, it’s fair to say collision shops will likely be slammed for the foreseeable future.

In other depressing news, finding and keeping qualified labor, getting parts on time and the lingering threats of COVID aren’t the only things you’ll continue to battle. Now, shop owners (and everyone else) get to deal with the current state of inflation.

If you haven’t had any work done around the shop and are one of the few who haven’t made any home improvements over the past 18 months, you haven’t had the experience of your eyebrows flying off your face when you discovered the price of the common 2×4. Idle hands and a worldwide lumber shortage sent retail prices soaring 323% at its peak in May. According to Fortune, the July futures contract price per thousand board feet of 2x4s has fallen from over $1,700 in May to $1,453 in July. However, it’s likely we’ll never see pre-pandemic trading prices again, which was anywhere between $300 to $500.

As of August 11, 2021, the U.S. Bureau of Labor Statistics (BLS) reported consumer prices rose 5.4% over the last 12 months (not seasonally adjusted). This is the most significant increase in a period since 2008.

Why it matters

Why is an insurance company talking about this? Mainly because inflation could be negatively impacting your property coverage – the coverage responsible for protecting the most significant asset on your books. Generally speaking, the amount you’re covered for does not increase at the same rate of inflation. In some cases, it doesn’t increase at all. So, due to current economic circumstances, you could be severely under-insured. Here’s what you need to know:

Replacement value vs. market value

As it relates to property coverage, you need to keep a thumb on the replacement value outlined in your policy versus the actual cost to rebuild today should you incur a partial or total loss. Unfortunately, property owners of all types (personal and commercial) confuse the replacement value listed on their policy with the market value of their property.

Replacement value is the cost to rebuild parts, or your entire building. It’s influenced by the construction industry’s supply of contractors and price of materials at the time of rebuild. Replacement value is not the same as market value. Market value is generally thought of as the price you could sell your property for. It’s based on the current value of other properties in your area that are similar in size and features and is influenced by the competitiveness of the buyers’ market. Both of these numbers are volatile, however, you’ll find a very static replacement value outlined in your policy. When the replacement value on your policy does not reflect today’s actual rate of construction and material, you could be forking over a fair amount of your own cash to get back up and running.

Material costs

According to the Associated General Contractors, 2021 Construction Inflation Alert, the cost of buying materials necessary to rebuild a property have increased by almost 13% in the past year. If your shop’s last replacement value evaluation took place before the pandemic, your policy might not reflect the actual cash you’d need if you suffered a loss.

Let’s do an overly-simplified example: if your property was evaluated pre-pandemic with a rebuild cost of $600,000, let’s say 50% of that total cost to rebuild is labor, and 50% is for materials. The 13% inflation could have you paying $39,000 out of pocket. At Intrepid Direct, we offer a 25% extension on rebuild costs to help owners account for extreme inflation like this. But even so, we recommend owners revisit the Replacement Value of their building each year.

Also, don’t forget about those other “buildings” you own. Outbuildings and other structures can also be associated with your property policy and can be included in the replacement evaluation. You may want to consider including paint booth(s) in your building limit as well. Paint booths can usually be included in the value of a building as they are considered permanent fixtures. Property coverage on a building is less expensive than business personal property (BPP) coverage. With paint booth costs soaring to $250,000 or more now, this little modification to your policy could save you a little cash today, and a whole lot of cash in the long run.

Co-Insurance

What happens when your building is underinsured and you have to make a claim? Well, it depends on how underinsured you are. Co-insurance clauses are often added to property policies by insurance companies in order to get insureds to carry the appropriate limits in relation to the value of their property. Co-insurance is designed to discourage insureds from “risking it.” When insurance companies tap into co-insurance in the event of a total or partial loss, underinsured policyholders will get hit with a co-insurance penalty.
Let’s say you procured a policy last year that insures your building for up to $600,000 along with an 80% co-insurance clause. Today, the cost to rebuild is now valued at $1,000,000. Yesterday, you experienced a partial loss worth $100,000 in damage. Unfortunately, due to your co-insurance clause of 80%, your building coverage should have been adjusted to $800,000 (80% of $1M). Because you’re currently sitting at 60% ($600,000/$1M), you will get hit with a penalty. Instead of receiving $100,000 for your building’s repairs, you will only receive $75,000.

Ordinance or Law

On your policy, look to see if you have “ordinance” or “law” coverage of at least $100,000. In the event of a total or even partial loss, you may be required to add building improvements to meet new codes. Having ordinance or law coverage can help pay for the costs of required improvements. Garage owners often renew their policy with the same insurance provider year after year. Make sure your provider is considering the cost of codes and updates.
According to Guardian Fire Protection Services, owning a building that does not have a sprinkler system installed will cost $2-$7 per square foot to install. If the building is historic, up to $10 per square foot. If you do not have ordinance and law coverage, your insurance provider may not allocate any funds to cover the required improvements to the property. Odds are, you’ll be footing the bill for those expenses.

Business Interruption

Business interruption insurance is almost always included on collision shop owners’ policy to protect their income and wages during a rebuild. If your shop can no longer continue operations, business interruption will cover those lost revenue dollars and wages that would have incurred if your shop was still operating at full capacity. On your policy, look for your coverage limit and waiting period. The coverage limit is the amount you’re covered for, which will either be up to a certain dollar amount or the actual loss sustained. The waiting period will be the amount of time until the coverage starts to kick in. This will either be from the moment the property is damaged or up to 72 hours later.

Another thing to keep tabs on is the employment rate within the construction industry. When there is a shortage in skilled labor, construction will likely take longer. During these times, you may want to consider extending the restoration period listed on your policy to help with losses associated with drawn out construction.

Flood and Earthquake

If your property is in an earthquake or flood-prone area, you should absolutely have coverage in place specifically designed to cover those risks. Your average property policy does not cover damages resulting from flood and earthquake events.

If you do not own property in a flood or earthquake zone, we still want owners to seriously consider putting these policies in place. “100-year” events can impact those not normally affected. Unfortunately, shop owners who suffer these losses will call their provider expecting help only to find their provider will not cover the loss. Look to see if you have this on your policy and if it’s not, it may be something you want to consider.

Stay on top of your policy

The last thing we want is for shop owners to invest their dollars into an insurance policy that does not fully protect them. If you lose your investment and are not fully covered, you could potentially be losing your business too. You may not be able to stop economic and social inflation but you can make sure you are protected against it. It may be a good idea to look for these items on your policy and discuss with your team what would be the best decision moving forward.

Image: (iStock/Juanmonino)