How to effectively adapt your insurance contract in light of current construction prices?

How to effectively adapt your insurance policy to current construction prices?

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The evolution of prices in the construction sector has a key impact on determining the insured value for a covered building. Insurance companies typically define this value as the cost-oriented amount required to acquire the building at a given location and time. In other words, the goal is to estimate the costs that would be necessary to incur for the construction of a specific building from the ground up, within a given time period and under specified conditions.

It is important to realize that the law assumes the policyholder sets the insured sum (the maximum limit of indemnity) at the time of concluding the insurance contract, which should correspond to the value of the property at the time of insurance. However, to ensure full compensation for the client in the event of an insured incident, it is essential to regularly update the insured sum, so that it corresponds to current prices in the construction market.

Two waves of price shock in construction materials occurred in 2021 and mid-2022. Some materials experienced price increases of more than double since the beginning of 2021. The current trend indicates that the prices of these monitored construction materials are moving towards price stabilization, specifically to an average value of around 140% of the level at the beginning of 2021.

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Full compensation for the client under a property insurance policy requires fulfilling two basic conditions, as outlined above:

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• Agree on an insured sum corresponding to the insured value of the property at the start of the insurance. The insured sum represents the maximum amount the insurance company pays in the event of property damage. This amount should be carefully determined at the beginning of the insurance and correspond to the value of the insured property at that time.
• Maintain a consistent relationship between the insured sum and the insured value throughout the duration of the insurance. To achieve full compensation in the event of an insured incident, it is essential to keep the insured sum's current value in line with market price developments. This ensures that the insured sum converges with the property's value and eliminates the risk of underinsurance.

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Clients can use tools and recommendations from insurance companies, which analyze building dimensions and material specifications, to determine the insured value of structures. The insured amount can be updated through indexation, where the amount is automatically adjusted in line with construction price developments. Alternatively, the client can independently determine and update the insured amount based on their knowledge of the insured property. The law recognizes the policyholder as the person who best knows the value of their property and allows them to determine the insured amount at their discretion.

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The frequency of updating the insured amount depends on many factors, including market price developments, extreme fluctuations, and the specifics of the insurance contract. Given market dynamics and potential changes in property value, it is generally recommended to update the insured amount regularly. In some cases, it may be advisable to perform this update every 2–3 years. Especially during periods of extreme fluctuations in construction work and material prices, as we have witnessed in recent years, it is advisable to update more frequently. Rapidly changing market conditions can mean that the originally agreed insured amount may not adequately cover the current value of the property. It is important to remember that if the insured amount is lower than the actual value of the property, we are talking about underinsurance. This underinsurance can lead to insufficient compensation in the event of an insured loss.

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Entrust us with your property insurance concerns. Eurovalley – the best insurance solution, or nothing.

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