The Hidden Cost of Underinsurance: What Texas Businesses Risk When Coverage Falls Short

Effective risk management means looking beyond predictable, day-to-day operational hurdles and preparing for high-impact events that can disrupt operations or damage property.

As EIS Council explains, the first step in planning for worst-case scenarios is anticipating the different disasters that could strike.

In Texas, that list is long. The state has been affected by more billion-dollar weather and climate disasters than any other state since 1980, according to NOAA's National Centers for Environmental Information, with 190 such events through 2024. Hurricanes, floods, wildfires, winter storms, tornadoes and hail all pose a recurring risk, although the hazards vary by location.

Will Your Coverage be Enough to Rebuild?

Knowing what a commercial property policy costs is not the same as knowing whether its limits are sufficient to rebuild. When limits rest on a replacement-cost estimate set years ago, the gap between what a policy pays on a covered loss and what recovery actually costs can fall squarely on the business, often at the worst possible moment.

Underinsurance can develop gradually when replacement costs and property values rise, equipment is added and operations expand without corresponding updates to coverage.

The gap can also be wider than policyholders expect. A study by Kenneth Klein, a law professor at California Western School of Law, analyzed 74,070 fire claims on California homes from 2018 to 2023 and found that 71% of destroyed homes were underinsured, with an average shortfall of about 19%, Insurance Business reported. The study focused on homeowners rather than businesses, but its central finding applies to any property owner: In most cases, the reconstruction estimates used to set coverage limits fell short of the actual cost to rebuild.

Rising Construction Costs Can Leave Property Valuations Behind

Construction costs have risen sharply since 2020. The Turner Building Cost Index, which tracks nonresidential construction costs nationally, reached 1,552 in the second quarter of 2026, up about 5% from a year earlier and roughly 32% above its 2020 average of 1,177.

In its 2026 quarterly updates, Turner cites rising steel, aluminum and copper costs and continued shortages of skilled mechanical and electrical labor. Strong demand from data center and advanced manufacturing projects adds pressure to construction resources.

The Insurance Information Institute notes that replacement costs for many commercial properties are revalued only every three to five years. National indexes do not capture every local market, but estimates more than a few years old deserve a fresh look.

Texas Weather Raises the Stakes

Hail offers a clear example. According to the Insurance Information Institute, Texas led the nation in 2025 with 902 major hail events, defined as hailstones 1 inch in diameter or larger.

Cotality's 2026 Severe Convective Storm Risk Report also highlighted the Texas Triangle (Dallas-Fort Worth, Houston, Austin and San Antonio) as a major concentration of residential hail exposure.

After a widespread storm, regional demand for roofers, contractors and building materials can push repair costs and timelines higher still.

Where Coverage Gaps Tend to Hide

Building limits draw the most attention, but underinsurance can surface in several parts of a commercial policy.

• Business personal property: Equipment, inventory, furniture, computers and tooling often accumulate over time. Coverage limits should reflect both changes in what the business owns and current replacement prices. For some equipment and materials, tariffs and supply constraints can add to replacement costs.
• Business income: Coverage can be subject to a dollar limit, a maximum coverage period or both. It generally pays covered lost net income and continuing operating expenses during the policy-defined period of restoration. If contractor and material shortages extend the time reasonably needed to rebuild, a dollar limit based on a shorter interruption may be exhausted before operations resume.
• Ordinance or law: An older building repaired after a covered loss may need to meet current building codes. Standard commercial property forms generally exclude or limit those added costs unless ordinance or law coverage is included. Because applicable code requirements vary by jurisdiction, the potential exposure depends heavily on location.

The Coinsurance Penalty

Many commercial property policies include a coinsurance clause requiring the business to carry insurance equal to a specified percentage of the property’s value, determined using the policy’s valuation basis. Common percentages are 80%, 90% and 100%. If coverage falls below that threshold at the time of a loss, the insurer can reduce the claim payment proportionally, even on a partial loss.

Consider a simplified example involving a replacement-cost policy with an applicable coinsurance clause. A building is insured for $2 million under an 80% coinsurance clause, but its current replacement cost is $2.6 million. The policy requires at least $2.08 million in coverage. Because the business carries $2 million, it has met about 96% of the requirement. On a $400,000 hail claim, the insurer would pay roughly $384,600 before the deductible, leaving the business to absorb the difference. In a total loss, the shortfall between the policy limit and the cost to rebuild would reach $600,000.

Policy wording varies, but the lesson holds: An outdated replacement-cost estimate can reduce payment on a partial loss, not just leave a shortfall after a total loss.

Practical Steps to Close the Gap

Avoiding underinsurance does not mean overinsuring. It means working from current information and reviewing coverage on a regular schedule.

• Update replacement-cost estimates regularly: Ask your agent whether a professional replacement-cost appraisal is appropriate, and update estimates between appraisals as costs and property characteristics change.
• Ask about inflation guard and agreed value options: An inflation guard provision increases limits by a selected percentage over the policy year, but that increase may not keep pace with actual rebuilding costs. An agreed value option can suspend coinsurance for the specified period when the insurer accepts the required statement of values and the policy’s conditions are met. Agreed value does not, by itself, increase the amount available to rebuild.
• Report changes promptly: Tell your agent promptly about new equipment, expansions, additional locations and major renovations rather than waiting until renewal.
• Revisit business income limits: Base the estimate on a realistic restoration period that reflects current contractor and supply timelines.
• Confirm which perils are covered: Standard commercial property policies generally exclude flood, which typically requires a separate policy.

Make Sure Your Coverage Reflects Today's Costs

At Dean & Draper, our team helps Texas businesses review replacement-cost estimates, coverage limits and policy provisions before a loss exposes a gap. If your limits have not been reviewed in the past year or two, contact Dean & Draper today to schedule a coverage review and assess whether your policy reflects today’s rebuilding costs.