Going green through the use of environmentally friendly practices, materials and technologies is the theme of business today. Paul Nutcher, a director for the Central Florida Chapter of the U.S. Green Building Council, wrote in the July issue of Inside Self-Storage about change in Florida from voluntary to mandatory enactment of green or sustainable building. Recently, San Francisco Mayor Gavin Newsom signed into law strict green building codes for new construction and renovations of existing buildings.
Unfortunately, these law or code changes could result in the most significant gap in property insurance for owners of existing self-storage facilities. They may lack proper insurance coverage for the enforcement of building ordinances or laws affecting repair or reconstruction of property. These gaps in coverage cause most people to see red rather than green.
Adopting New Standards
Building codes regulate construction standards and specifications primarily to protect people from dangers of fire and building collapse. Adoption of green or sustainable building standards affect construction costs through building material specifications and mandating the efficiency of systems that draw on the use of water and energy resources. The Americans With Disabilities Act of 1990 also added standards for new construction and alterations of existing buildings to accommodate people with disabilities.
Although the self-storage industry is rather young, a substantial part of its infrastructure dates back more than 30 years when construction standards were much different than current building codes. While many older facilities have been renovated over time, most remodeling focuses on maintaining the marketability of a facility. These improvements may not include building-code upgrades often required in the event of substantial building repair.
Evaluate Your Existing Policy
As a self-storage facility owner, you likely purchased property insurance to cover any substantial repairs or to replace your buildings in the event of a fire, wind storm or other similarly devastating causes of loss.
Most insurance agents and companies estimate the proper dollar amount to repair or replace the existing structures with like kind and quality based on good information about your facility, including size, construction type and special features. This process should also include loss of income during the time required to repair, rebuild or restore your business to your previous income- producing level. Loss of income coverage is often written in conjunction with the building insurance.
Insuring for Code Changes
Proper evaluation of the cost to rebuild your existing property is particularly important if your policy includes a co-insurance clause. This clause reduces the amount of payment for repair or replacement of a partial loss unless your insurance limit is equal to at least 80 percent of the replacement cost of the insured property at the time of the loss.
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.