Inflation in Australia is on the rise, as evidenced by the latest figures from the Australian Bureau of Statistics (ABS) which indicate the national rate of inflation is 6.1%.

But the situation is even more dire in the building and construction industry with CoreLogic’s Cordell Construction Cost Index (CCCI) for Q2 2022 showing a national increase in residential construction costs of 10% over the 12 months to June 2022. This is the highest annual growth rate on record outside of the introduction of the GST.

What has caused inflation in the construction industry?

Inflation in the building industry is being driven by price increases for both building materials and labour. The hangover from overseas factory shutdowns and shipping delays due to Covid-19 has made materials scarce, and therefore, more expensive. This has been compounded due to an increasing number of large government construction projects, as well as rebuilding required off the back of recent natural disasters in Australia, both of which have driven up demand for building materials.

These issues have also affected the availability and cost of labour in the construction industry, which has been further impacted by the absence of overseas tradespeople, who often fill this gap, coming to Australia to work.

What are the insurance implications?

Insurance is designed to get you back to the same position that you were in before the loss, which means that your sums insured need to accurately reflect the cost of reinstatement. Further, many insurance policies include an average clause (also known as a co-insurance clause) which place penalties on the claim where the property is underinsured. While there are many different co-insurance calculations depending on the policy, in essence your claim pay out may be reduced by the proportion of your underinsurance. 

For example, if you insure your premises for $200,000 when the actual building value is $400,000, you may be liable to cover 50% of the cost of any claim, even if the claim is not a total loss and is below your $200,000 sum insured.

What can you do to protect yourself?

In an environment of high and increasing inflation, it is difficult to know the cost of rebuilding and replacement and we strongly recommend independent valuations be obtained. Not only will a valuation transfer the valuation risk from yourselves to another party but, for commercial property, it can also be leveraged by Gow-Gates Insurance Brokers to negotiate the removal of the co-insurance clauses from your policy.

Another risk is the lead time to rebuild, with builders reporting significant supply delays. Each insurance policy should be reviewed to ensure that the business interruption indemnity period provides sufficient time for businesses to rebuild and re-establish trade, , and in the case of residential insurances, coverage should include allowances for alternative accommodation.

How Gow-Gates can help

To discuss how the current situation in the construction industry may affect your insurance, or for help in arranging an independent valuation, please contact the Gow-Gates team via email at info@gowgates.com.au or phone us on 02 8267 9999.