Sticker Shock: Understanding Rising Replacement Costs in Winery Insurance

By Larry Chasin, Chief Executive Officer, Winery PAK Insurance Program & PAK Programs

With the rash of recent wildfires, not surprisingly, there has been a renewed focus on the part of winery owners in risk mitigation, as well as comprehensive insurance coverage. Many of these proprietors have spent years perfecting their craft and have witnessed firsthand the violent destruction these wildfires have left in their wake. They want to do what they can to protect the properties they have poured their lives into. 

While these winery owners may expect to learn of gaps in their existing coverage and new risk exposures on their properties upon reaching out to their insurance partners, many have been surprised by something else. Rising costs tied to replacement values are leading to sticker shock for many winery owners. Higher prices on commodities, a labor shortage and pandemic-related logistical issues are causing the cost of lumber and other building materials to soar – and insurance must cover those costs should the worst happen. 

A Perfect Storm

A leading indicator for the construction sector, the IHS Markit PEG Engineering and Construction Cost Index (ECCI), reported that engineering and construction costs rose for the fifth month in a row with the headline cost index rising to 79.5 in March from 68.2 in February. Further, the six-month headline expectations for these costs rose to 81.3 in March from 76.6 in February, signaling that those surveyed expect prices to continue to rise in the coming months. Specifically, price increases were noted in materials and equipment, subcontractor labor, ocean freight, steel, transformers, and copper. 

Since the start of the COVID-19 pandemic, the price of lumber has risen 232 percent and could continue to grow, a recent article in FORTUNE reported. The author noted supply is backed up and can’t catch a breath as renovations and construction projects continue. The article attributed the problem to a perfect storm involving pandemic lockdowns that stopped production, homebound DIYers, low-interest rates that have boosted the housing market, limited manufacturing capacity and a labor shortage. 

While rising prices are not good news for replacement costs on any insurance policy, they can be particularly hard to stomach for winery owners, whose properties often house multiple facilities and use high-end materials and finishes in construction. Just think about the ornate stonework, hand-cut finishes, detailed stucco work, ground-to-ceiling glass walls and other architectural details that go into the construction of many of these wineries. While it was costly to build a structure with such architectural details originally, it’s now even more costly to rebuild should the worst happen.

Unfortunately, my company learned this the hard way. When one winery owner first came to us, the property had been valued at $6 million. Our experienced team knew right away that the value was exceptionally low and after discussion let the insured know it would be more than double to rebuild. The insured requested a $10 million limit. During last summer’s fires, this winery, sadly, suffered significant damage – devastating for everyone involved. What made things worse – replacement costs came to $16 million, leaving the policyholder to pay several million in reconstruction costs out of pocket. 

A Step in the Right Direction

With these rising replacement costs, leading insurers in the wine industry are hiring building consultants to visit wineries to get a professional estimate on rebuilding costs for the property. 

At the same time, winery owners should be sure that their insurance agents are doing their due diligence to ensure their properties have been properly valued. Owners need to do their part too – by sharing information on structures that might have been overlooked, new equipment, patio features and more. Insurers are no longer offering blanket property limits in many cases, so winery owners must make sure they and their insurance partner go over every detail of the property when assessing values and limits. Working with an insurance partner who specializes in the industry will also go a long way.

An accurate estimate of replacement costs will lead to a comprehensive insurance policy that a winery owner can trust to protect their business in these tumultuous times. While it may cause sticker shock at first in terms of premiums, the business will benefit in the end should the winery owner need to file a claim or experience a total loss. 

Remember, insurance exists to support property owners in their times of need and fuel rebuilding and new life for the business and the community around it. Without a proper and up-to-date assessment of the property’s value, an insurer cannot provide the comprehensive coverage that winery owners deserve.