Inflation has been a persistent news headline for the past few years, and for good reason. With an annual inflation rate of 2.7%, rising materials, labor, and equipment costs have quickly squeezed profit margins and created unexpected financial strain for businesses and consumers alike. For many small and mid-sized companies, these pressures impact day-to-day operations and affect their approach to insurance coverage.
“Due to the rising costs from inflation—and in general, including tariffs—the cost of construction materials, labor, and equipment is rising quicker than it has in the past,” says Rachel Pinsonneault, commercial lines staff underwriter at Central Insurance. “With the pandemic in 2020, these costs shot up significantly, especially for construction materials.”
In the article below, Pinsonneault shares inflation protection strategies for businesses, provides proactive planning ideas, and explains how adequate insurance coverage can help your business stay prepared and protected from the challenges that lie ahead.
Inflation’s Double Hit on Businesses—and Where Inflation Protection Fits
Inflation impacts businesses in two major ways: the rising cost of goods and services and the increased cost of insurance premiums.
Due to increases in the cost of rebuilding, repairing, or replacing business property, policyholders may also have to increase coverage limits to keep pace. At the same time, premiums have risen across the board because insurance providers are paying more for every claim—whether it’s a building repair, auto accident, or equipment replacement.
“If you own a building worth a million dollars and have it insured for that, inflation may increase the replacement cost to $1.2 million,” Pinsonneault shares. “Now you need to raise your limits, but your premium also goes up because the dollar doesn’t go as far. It’s a double whammy.”
This “double hit” is one of the most challenging aspects of operating in an inflationary environment. Even businesses with well-structured budgets can be caught off guard when both their replacement costs and their insurance costs rise at the same time.
That’s why Pinsonneault emphasizes the importance of building inflation protection into your insurance program, so you’re not left underinsured or blindsided when costs surge.
Why Inflation Protection Is Key to Small Business Resilience
While inflation affects everyone, smaller businesses often feel it more acutely. Larger companies may have supply reserves or stronger negotiating power, but smaller ones must adjust quickly to rising costs.
“A medium-sized company is going to get hit sooner because the cost of their products rises and they have less supply on hand,” Pinsonneault comments. “They have to replace it sooner.” Inflation can lead smaller businesses increasing prices to keep pace, only to lose customers to larger competitors who can delay raising their own.
While insurance becomes critical here, Pinsonneault points out that its impact is still often overlooked:
Inflation Protection Starts with Commercial Property Coverage
According to Pinsonneault, property insurance is the commercial policy most directly affected by inflation. As material and labor costs rise, repair or rebuild costs rise, making accurate coverage limits vital.
“Property is going to be the most impacted because it’s the first line affected,” Pinsonneault stresses. “Inflation hits the cost to replace property sooner than it does liability coverages.”
Commercial insurance is designed to transfer the burden of major financial loss to the insurance company, allowing you to keep capital focused on growing your business. While inflation is beyond your control, you can strengthen your financial protection by reviewing your current building limits and confirming they reflect today’s replacement costs—preparing your business for a total loss.
Pinsonneault recommends leveraging an independent insurance agent for assistance in keeping property limits accurate.
“Agents have tools and programs that can estimate the replacement cost of properties,” she says. “They can factor in building materials, height, number of stories, and more. Sometimes, if a property is unusual, we even encourage owners to get a contractor’s quote to be sure.”
Why Inflation Protection Matters in Insurance to Value and Co-Insurance
One concept that becomes especially important during inflationary times is insurance to value, which includes ensuring your coverage reflects the true cost to replace insured assets. Underinsuring can trigger co-insurance penalties with many carriers.
“If someone insures a building for $500,000 that actually costs $1 million to replace, they’re at 50% insurance to value,” Pinsonneault explains. “With co-insurance penalties, they may only receive a portion of their loss. Even though their limit is $500,000, they might only get $400,000 because they are underinsured.”
Fortunately, Central handles things differently.
Inflation Protection at Its Best: The Inflation Guard Endorsement
Another option businesses should be aware of is the inflation guard endorsement, which automatically adjusts your policy limits each year to keep pace with inflation trends. An insurance endorsement lets businesses customize coverage by adding new benefits, expanding protections, or excluding certain risks to better fit their needs.
“Many property policies have inflation guard endorsements,” Pinsonneault mentions. “Every year, the values of your building or business personal property are bumped up by the known inflation for the area. Not all carriers have this, but it’s very important because it means you won’t fall behind.”
These endorsements use regional inflation data, factoring in the real-world rise in labor, materials, and construction costs in a given state. Many standard carriers include this feature automatically because they want policies to keep up with increasing costs.
As Pinsonneault points out, this became especially critical in 2022 when construction expenses surged dramatically. However, she cautioned that the adjustment often takes effect at renewal, so a major loss before renewal could still leave a gap.
This built-in adjustment offers peace of mind and may minimize the need for constant manual reviews. It can also save agents time since they may not need to recalculate limits each year.
While some coverages—like business income or Builder’s Risk—may not include automatic inflation protection, for property policies, “the inflation guard is one of the best safeguards you can have to keep up with rising costs.”
Keep in Mind: Some policyholders may be tempted to decline the inflation guard, but doing so removes a key protection. By keeping this endorsement in place, businesses gain a valuable safeguard that helps ensure they aren’t underinsured when inflation drives costs upward.
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Work With an Insurance Partner Who Understands Inflation Protection
Inflation is not going away any time soon, and for businesses, that means higher costs across the board. From construction and repairs to inventory and equipment, today’s replacement costs look very different from those of just a few years ago. Insurance limits can lag behind reality without careful attention, leaving businesses underinsured when it matters most.
“Insurance is there to protect you, but only if you keep up with the right limits and the right coverages. Inflation makes that more important than ever,” Pinsonneault states.
At Central Insurance, we understand the pressures businesses face in uncertain economic times. That’s why we provide tailored coverage, inflation-conscious solutions like waived co-insurance penalties, and the guidance of our experienced independent agents.
Our agents live and work in the communities they serve, giving them unique insight into local cost trends and business challenges. They don’t just sell a policy—they build relationships, ask the right questions, and help you anticipate where inflation could expose gaps in your protection. With their guidance, you can be confident that your coverage keeps pace with changing economic conditions while still fitting the realities of your business.
With the right insurance partner, you can inflation-proof your insurance coverage and protect your business against the cost surges of tomorrow.
Contact your hand-selected, local Central agent to discuss how to inflation-proof your business.
The information above is of a general nature and your policy and coverages provided may differ from the examples provided. Please read your policy in its entirety to determine your actual coverage available.
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