For many reasons – hurricanes, cost of petroleum and inflation – the past three years have shown tremendous pressure on the cost of building structures of all types. Whether it is a dwelling, machine shed, feed mill, office or other type of structure, the cost to build new has increased in many instances by at least 15 to 30 percent. With that in mind, cattlemen, especially feedlots with their computerized feed mills and extensive constructed facilities, should consider a review to verify that current limits of insurance are adequate.

The first step might be to visit with the contractor that you would use to replace your structures if they were destroyed. Ask them to give you an idea of the total cost to rebuild those structures using today’s costs. Many of our current clients are shocked after finding out just how much those costs have escalated recently. For example, I was visiting with a person earlier this summer regarding building costs when he explained that he recently completed a large steel structure to double his operation. The current cost was $1.3 million. Just three years earlier he had built an identical building for $825,000 using the same contractor. That difference is simply amazing – and scary.

When I visit with clients regarding the replacement costs of their structures, many questions arise. Here are a few examples:

“I know that if I rebuilt that building like it is today, it would cost a fortune. But how do I handle it when I would rebuild it much differently than it is today?” I suggest that a person with that type of scenario visit with his agent and insurance company about Functional Replacement Cost to address what can be a unique situation.

“Why should I insure my dwelling or that building for the replacement cost limit you suggest since I couldn’t sell it for anything close to that amount?” I would agree that in most instances you can’t sell the item in question for what it would cost to rebuild it. But an insurance policy that provides “replacement” cost coverage is intending to do just that – replace the structure in the event of a total loss. If you choose to insure it for a lesser amount, watch out for the co-insurance provision in the event of a partial loss.

“If I change my mind after a loss occurs to my building, do I have to rebuild it to be paid?” Most policies have a provision in them that, even though you might have a structure insured for “replacement cost,” you can take the option of not replacing. But keep in mind that if you do not rebuild, the settlement is to be “actual cash value” (which takes depreciation into account).

If you take anything away from reading this article, it should be that construction costs have escalated recently and many times, unless you specifically address those higher costs with your insurance agent, you could be in for an unwanted surprise in the event of a loss.

If you have any questions regarding replacement cost or other insurance-related issues, don’t hesitate to call us at (800) 279-2081.

By Shane Belohrad, principal in the Grace/Mayer Insurance Agency of Omaha.