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The aftermath of hurricane Sandy is shedding some light on an often overlooked coverage that could be critical to any property insurance policyholder with a major property claim.
Building codes in many states have been and are being changed and strengthened in response to events such as hurricanes, floods, tornadoes, earthquakes, wildfires and such. Engineers have examined the damage caused by these various events and concluded that strengthening and enforcing stricter requirements in building construction can reduce or minimize damage from these natural catastrophes.
Florida began tightening it’s building codes after Hurricane Andrew in 1992, up to then the worst storm in recorded history. Much damage was noted from roofs blowing off and windows blowing in; new building codes mandated strengthening the way that roofs are secured to structures, and required stronger storm proof windows or storm shutters be installed. California has a well documented history of requiring greater earthquake resistance in structures. Nationally, building codes are requiring that buildings damaged or destroyed by flood be rebuilt with floor levels lifted out of the flood danger elevation. Similar examples exist across the country.
Property insurance policies these days are most commonly written on a replacement cost valuation basis. Replacement cost is defined as the cost to replace damaged property with “like kind or quality”, without deduction for depreciation. It’s a good deal; the policyholder can essentially replace an older, perhaps somewhat worn out structure with a brand new one… new for old.
But while replacement cost coverage will pay to replace what was there, won’t pay to upgrade what was there, and that’s what tougher building codes are requiring. Take a simple example, again from Sandy. Homes damaged by that storm must be replaced, but new codes are being enforced mandating construction above flood elevation. Cost to elevate a flood exposed home on pilings can run an additional $30,000 to $70,000, depending on the size of the home and how high it must be raised. Those numbers are in addition to the replacement cost of the structure. Now imagine this scenario in the case of a larger commercial building; the problem is even greater. And there are many other building code or zoning changes that could mandate expensive upgrades to electrical systems, plumbing, ingress or egress and other building features and components.
The standard property policy will afford some coverage for these increased costs, but the form is sublimited to only $10,000 in coverage. For anyone requiring higher limits there is a specific policy endorsement that addresses this need, the Ordnance or Law Coverage form. There are three separate additional coverages included in this form:
• Coverage A is Coverage for Loss to the Undamaged Portion of the Building. Here’s how it works: your building catches fire and suffers damage equal to 50% of its value. Building officials say you can’t just rebuild the damaged half, you must demolish the remaining undamaged part of the structure and rebuild the whole thing. The undamaged part did not burn; it must be demolished due to building codes. This coverage will pay you for that.
• Coverage B is Demolition Cost Coverage. Debris removal cost to cart away the debris from the fire is covered as part of your building limit, but the often expensive cost to demolish the rest of the building is not…unless you have this endorsement.
• Coverage C is Increased Cost of Construction. Building codes say that you have to elevate the floor level, put on a roof that complies with current codes, and upgrade the electrical system. These upgrades will add significantly to the cost of reconstruction. This coverage will pay you for that.
Coverage A does not add to your limit of liability, its included within it. Coverage B and C may have a specific limit of insurance, or may be included in the building limit. You need to give some thought to limits, and be sure you have enough.
Building laws have been changing fairly consistently over the past decade or so, and increased attention to the possible effects of possible climate change and the recent history of unusual and severe weather events will likely continue to motivate more changes in the future. The fact that you might be insuring a relatively newer building does not insulate you from the possible need for these coverages; almost every commercial property insurance buyer should consider them. Give us a call and we’ll be happy to review these further with you.