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The recent earthquake in California were notable mostly because of where it happened, right in the middle of Napa Valley, home to some of the finest wineries in both California and the U.S. News reports were full of pictures of toppled wine racks and barrels, and the breakage and loss of considerable amounts of fine wine. A few reports also went on to note that while barrels and tanks suffered major damage, in most cases the buildings that housed them, having been constructed to modern earthquake resistant standards, withstood the quake with minimal damage. The buildings that were damaged were mainly the older ones in towns, built before current standards were implemented.
California, like many other states, has significantly strengthened building codes over the past decade or two. To understand why it’s only necessary to look at the news. Earthquakes, wildfires, sudden massive rainfall events, tornadoes, hurricanes, winter storms…all seem to be increasingly more frequent, and increasingly more severe. Building officials read the same news reports, and are overhauling building codes to make new structures more resistant to the types of events to which they might be exposed.
Hurricane Andrew, back in 1992, really started this process. It did massive damage to south Florida, but also exposed severe weaknesses in the buildings it destroyed. Experts (including many insurance company claims people) realized that most of the buildings they looked at were constructed with virtually no consideration to the possibility of a hurricane, resulting in unnecessarily severe damage from the storm. Subsequently, Florida drew on what was learned from the storm and enacted new building codes that significantly strengthened hurricane resistant features in new buildings.
This same scenario has been repeated in other states across the country. What this means for almost all building owners is if you own a building more than ten or twenty years old, chances are if it were to be significantly damaged tomorrow you would most likely not be able to rebuild it the same way it was originally constructed; newer, stricter (and more expensive) building codes now apply.
This has insurance implications. Property policies are most commonly written to provide replacement cost coverage on insured property. Replacement cost, by definition, is the cost to replace damaged or destroyed property with property of “like kind or quality”. Put another way, you’ll get paid to rebuild what was there before the loss, new for old, without depreciation.
But suppose what was there was not up to current building codes? The cost to rebuild a building thirty or more years old to current codes could easily be increased by ten or twenty percent, or more in certain parts of the country. Who pays for that? Your replacement cost property policy will pay you for what was there before the loss, but a standard, unmodified property insurance policy gives you only a token coverage enhancement of $10,000 for additional costs you’ll incur to comply with current building codes. If your costs exceed that modest threshold, you have no coverage for them.
There is a solution, of course. A simple and common endorsement to your policy, called Increased Cost of Construction, fills the gap. Think of it as replacement cost, plus. You get replacement cost for the damaged building, plus increased costs to comply with current codes. Nifty, easy, and the endorsement doesn’t cost anything.
There is no cost but it’s not without cost because of course in theory you must buy higher limits. That’s not the problem it might appear to be, though. Most folks who buy property insurance on a replacement cost basis generally make a good faith effort to accurately determine for insurance purposes the actual current replacement cost, in current dollars, of their property. There are a number of resources out there to aid in that, up to and including an appraisal by a qualified contractor or appraiser. The thing is, the replacement cost valuations all these sources give you will be current replacement costs to current building codes. So if you have made a good faith effort to keep your replacement cost insurance limits up to date, you are likely already paying for insurance to values that include the increased costs of rebuilding to current building codes.
Yet, surprisingly, we still occasionally see folks who have neglected to add coverage for Increased Cost of Construction to their policy. This is the worst of all worlds; a loss would be paid based on replacing only what was there, not what needs to be there based on current building codes, even though you paid for the higher amount of insurance all along.
So, real problem, simple solution, and in most cases no additional cost. Give us a call and let us see if this is something we can help you with.
What this means for almost all building owners is if you own a building more than ten or twenty years old, chances are if it were to be significantly damaged tomorrow you would most likely not be able to rebuild it the same way it was originally constructed; newer, stricter (and more expensive) building codes now apply.