Without conscious endorsement or modification, the typical property insurance policy will either exclude or substantially limit the amount of coverage for any financial loss created by the operation of building codes or laws. These code changes may increase the cost or time to repair or replace the property. Any delay in repairing the structure will increase the loss of income.
A property insurance policy can be modified or endorsed to compensate you for costs associated with building laws. Most coverage works well when you are allowed to repair or replace your property to its prior condition. However, the additional costs associated with building improvements and changes required by new building codes may not be included in your insurance evaluation.
Can You Afford to Rebuild?
Most municipalities require that if 50 percent or more of a building is damaged the entire structure be rebuilt to building codes. To bring your building into compliance with current building codes, you may be required to raze the entire structure.
Without proper building-ordinance coverage in your insurance policy, the cost to demolish and rebuild the undamaged portion of the structure, loss of rents, and the additional cost of reconstruction of the entire building due to code enforcement could come out of your pocket. Under these conditions, the additional amount of the loss due to building-code enforcement might easily exceed the cost to restore the building to its original condition and to pay for the loss of rents normally associated only with the direct damage.
Building Ordinance Coverage
There are four major coverages associated with building ordinances that should be addressed when assessing and insuring the building-ordinance exposure.
Demolition coverage: This coverage pays for the cost to demolish the undamaged portion of an insured structure that must be razed to rebuild according to current building codes.
Loss of value: This coverage pays for the loss of value to the undamaged portion of an insured structure that must be demolished due to current building codes.
Increased cost of construction: This coverage pays for the increased expense of repair or replacement of the insured building up to applicable code standards.
Increased loss of income: This coverage pays for the additional rental loss on units in the undamaged portion of the building and loss of rents resulting from any increased period of restoration.
Recognizing you may be required to make substantial alterations and upgrades to your property to meet current building codes is the first step in transferring the financial risk of this exposure to your insurance company. The second and more difficult step is in determining what building-code enforcement might require of you following a property loss.
While your insurance agent may be helpful in estimating the cost to reconstruct your existing property as is, he generally does not have information or resources to properly evaluate the building-ordinance exposure. Your best source for this information is a knowledgeable general contractor familiar with your area’s building codes and enforcement.
Scott Lancaster is the regulatory compliance officer for Deans & Homer, a provider of insurance products designed to respond to the unique risks of the self-storage industry. For more information, call 800.847.9999; visit www.self-storage-insurance.com.