Tariffs are back in the headlines—and they’re quietly reshaping property insurance outcomes. Join Reed Smith’s Nick Insua, Esther Kim and Maame Boateng as they unpack whether tariff-driven construction cost increases are covered under first-party property policies with replacement cost provisions. We translate doctrine into dollars: why the answer is generally “yes,” how timing and location of loss matter, and what policyholders need to do now on limits, timelines, and premiums to avoid unwelcome surprises when rebuilding costs outrun expectations. We also discuss tariffs and their impact on insurance policies in general.
Transcript:
Maame: Hello everyone and welcome back to Insured Success. I am Maame Boateng an Insurance Recovery Associate Attorney in Reed Smith Wilmington office. And today I am joined by Nick Insua an insurance recovery partner in our New York and Princeton offices. And I'm also joined by Esther Kim, an insurance recovery senior associate in our Philadelphia office. As part of the insurance recovery group, we represent policyholders in complex insurance disputes and we also counsel corporate policyholders and coverage issues. In today's episode, we will be discussing tariffs and their impact on costs, specifically construction costs, whether they're afforded coverage and best practices for policyholders in seeking coverage. Nick and Esther, thank you for joining us today. Nick, can you set the stage for us? What are some of the risks or challenges that policyholders face as a result of these tariffs?
Nick: Sure, thank you for context in. 2025, we saw tariffs imposed or adjusted on automobiles, heavy trucks. Steel aluminum lumber furniture. Semiconductors pharmaceuticals copper. And other things these increases in costs have led to increases in premiums for policyholders. Tariffs on essential construction materials especially those sourced from nearby partners like Canada and Mexico, drive up the price of repairing or replacing damaged property. As a result, insurers recalibrate replacement cost estimates, which in turn affects the premiums policyholders pay.
Maame: Thanks for that helpful context, Nick. So generally, so the tariffs are rippling into higher construction costs and then which in turn are leading to higher premiums. Now building on that, in terms of coverage for policyholders looking to protect their businesses against these challenges that Nick talked about, what kinds of coverage are we talking about?
Esther: That's a great question. And you know, the simple answer is starting out, the policyholders are going to look at their property policies. Property insurance is a form of first party coverage that pays the policyholder for damage to their own property. It is called first property because it covers direct losses suffered by the insured, not injuries or damage claimed by others. Losses sustained by third parties are addressed under third party liability insurance. So the goal of property insurance is to protect against fortuitous loss. The core elements of these policies are the causes of loss that are covered and the perils that are excluded. All risk policies are the most prevalent property policies, which cover all loss not expressly excluded. So this framework applies to commercial property policies, including builder's risk, as well as to homeowners' policies. In many cases, whether coverage exists turns on what caused the loss.
Maame: Thanks Esther. So we have these increases in construction costs and then you mentioned these first party property insurance policies. Now are tariff driven spikes in construction costs generally covered under these first party property policies?
Nick: In general, yes, they are. Purchasers of first party or property insurance policies can elect replacement costs or actual cash value or agreed value recovery. Most choose replacement cost. Replacement cost value coverage and property insurance pays to repair or replace damaged structures and personal belongings with new, similar quality materials at current market prices without deductible depreciation. This type of coverage ensures full repair costs regardless of an item's age, though it usually has higher premiums. Imagine a hurricane tears through your neighborhood and leaves your roof badly damaged. Your policy ensures the roof at replacement costs. The insurer pays the full amount needed to repair or replace it with new material of similar kind and quality without deducting for the roof's age of prior condition. In short, replacement cost is designed to put you back in the position you were in before the storm. It meant to reflect the cost to replace at the time and place of the loss. It typically captures local time of loss twice including those driven by tariffs. Actual cash value or agreed value recovery on the other hand factors in depreciation. This means you'll get the current value of your items after subtracting certain amounts based on the property's age, condition, and how outdated or obsolete it is at the time of the loss. Often, where replacement cost is driven up by shortages of materials or labor, such as after a mass disaster, like a hurricane or a tornado, replacement cost includes local spikes and costs driven by those shortages. Although insurers have tested this, generally accepted that replacement cost is the cost to replace at the time and place of the loss, even where there are the spikes in costs. That said, policy line with matters and practical constraints like timing conditions or location of replacement, take cap or narrow recovery. So the guess often comes with qualifications. Further, many policies seek to avoid the inflationary effect on replacement costs by limiting the policy of actual cash if replacement is not affected within a certain time, which is typically two years.
Maame: Thanks, Nick. That's a very helpful breakdown of replacement costs and actual cash value. And it's important for policyholders to know those there is any specific policy language that most clearly confirms that replacement costs means costs at the time and place of loss.
Esther: Yes, policyholders should look for definitions and endorsements that tie valuation to the cost to repair or replace with like, kind, and quality at the location and at the time of loss. That framing is consistent with capturing local spikes in labor materials caused by tariffs, as Nick mentioned. Conversely, if the policy pushes toward historical or remote pricing benchmarks, or if it embeds constraints on timing or location, you can expect more friction on whether tariff-inflated costs are fully recognized by the insurer.
Maame: Thanks, Esther. That's very helpful and very important reminder that the wording or the language really drives outcomes, especially time, valuation to time and place of loss to capture some of these tariff-driven spikes. Now, with that in mind, Nick, what are some of the ways that tariffs may affect replacement costs and what can policyholders do to preempt these issues?
Nick: Sure. The bigger issues related to how tariffs may affect replacement costs are one, whether policyholders have purchased sufficient limits, and two, the premium to be charged for policies promising replacement costs. Adequate limits are critical. If input costs surge, under insurance becomes a real risk. Policyholders should stress test their limits against scenarios where tariffs drive double-digit material or equipment inflation and revisit limits more frequently than the usual annual timing. Because replacement costs generally tracks time of loss pricing, the coverage can keep pace, but only up to your limits. Policyholders should build headroom into their limits through these spikes, rather than relying on last year's estimates or otherwise outdated estimates. The premium to be charged for replacement costs is also typically higher than actual cash value, and policy owners should be prepared for those higher costs.
Maame: Thanks, Nick. That's a good articulation of the two sorts of pressure points. Like on one hand, policyholders should make sure that their limits are keeping pace with some of these tariff-driven cost surges. And then on the other hand, recognizing that the replacement cost coverage also comes with higher premiums. Now in practice, how often do timing provisions force like an actual cash value only outcome and what steps can policyholders take to preserve replacement cost recovery?
Esther: So many policies condition payment of full replacement cost on timely repair or replacement, making initial payments at actual cash value only. If deadlines slip due to backlogs or supply chain delays, policyholders can be stuck at actual cash value. To preserve replacement costs, policyholders should calendar the timing conditions immediately, document procurement and construction milestones and proactively seek extensions where the delays are outside your control. It's important to give early notice as well to the carrier on timing challenges.
Maame: Thanks, Esther. That's an important caution. Timing is very important. a policyholder fails to notify their insurance company early, they may be stuck with actual cash value and perhaps lose any replacement cost benefits. Nick, you mentioned earlier that if the policyholder replaces elsewhere at less cost, that could potentially cap recovery. So when might rebuilding at a different location be strategic and how should policyholders weigh the trade off against any capped recovery?
Nick: So relocating can make sense for operational or zoning reasons, but many policies cap recovery when the replacement occurs at a different site or with non-like-kind materials, which dampens the benefit of lower-cost markets or different configurations of the property. What the policy owner needs to think about is whether the operational upside of relocation outweighs the potential reduction in covered replacement costs. Policyholders should model both outcomes before committing to their property policies or any rebuilding.
Maame: Thanks, Nick. That's a good reality check because relocating may make business sense, but it could affect a policyholder's recovery under their policy. So it's important for our policyholders to be mindful of that. Now, how are insurers underwriting and pricing replacement costs amid all the tariff unsettledties and what negotiation levers do policy holders have, if any.
Esther: Policyholders can expect higher premiums for robust replacement cost coverage when carrier sees sustained volatility in materials and labor. Underwriters price for uncertainty, so negotiation levers include granular schedule of values data. A schedule of values and construction is an itemized document breaking down the total contract sum into individual manageable work tasks, assigning a specific cost to each it acts as a project roadmap mapping out costs for materials and labor for every phase from mobilization to close out to facilitate accurate payment applications, project tracking, and cash flow management. Having this data will enable the policyholder to negotiate the replacement cost coverage. Also, policyholders should take steps that reduce project delays and have clear endorsements confirming time and costs to minimize any issues with coverage.
Maame: Thank you Esther. Those are very helpful points. Another thing that I would also add is for policyholders to always inform the insurance company of any upgrades or any safety related improvements that they make to the property to manage risks so that their property looks more appealing to an insurance underwriter. I think that this could lead to better pricing. It could also lead to broader terms when it's time for the insurance companies to renew their policies. So let me ask you to get a bit concrete here, Nick. If you had to give a quick checklist of best practices, what are some of the steps that policyholders should take now?
Nick: First, I would confirm that the policies replacement cost language ties to time and place of loss and identify any timing conditions or location limits that could cap recovery. Next, I'd reassess limits with tariff-driven surge scenarios in mind. You'd make sure to have adequate limits and build in headroom to avoid shortfalls if reconstruction bids come in high. Third, I prepare for higher premiums and bring data to the renewal, updated valuations, supply chain timelines, and realistic cost escalation curves.
Maame: Well, thank you so much, Nick and Esther. And just before we wrap up, know, a few takeaways from everything that we've heard here is, you know, the bottom line is replacement cause provisions in first party property policies do generally capture time of loss spikes, but timing and location can still cap recovery. So it's important that policyholders get the language right, that they keep their limits current and adequate and then ensure that you're providing adequate notice to your insurance company. Well, a big thank you to Nick and Esther for the wealth of information that they've shared today. And thank you to the folks who tuned in to listen. Be sure to look out for our next episodes. And if anyone out there would like to discuss anything that you've heard today, all of our attorney's information is on our website and we'll be glad to hear from you.
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