Should you suffer a loss to your building, most property insurance policies, if written on a replacement cost basis will pay for the replacement of the damaged portion of the building, after it is established that the reason or cause of the loss is covered by the policy. For example, if your building is damaged due to a fire and fire is a covered cause of loss on your policy, the intent of the policy is to assist in the rebuilding of the damage caused by the fire. All circumstances are different and all claims will be handled by an insurance adjuster who will work with you in determining the cause of the loss and the manner in which it will be paid under the policy.
It may be obvious, but to make it clear, the insurance company’s only obligation is to address the damage that resulted from a covered cause of loss. Any portion of the building that was not directly damaged by the covered cause of loss, will not be covered. For example, if a building suffers a fire loss to the roof and the insurance adjuster has determined that coverage is provided by the policy, the insurance company’s only obligation is to assist in the damage caused by the fire. The company will repair the portion of the roof damaged, but will not replace any other portion of the roof that may not match in appearance, material or any other difference – to do so would be at your own expense.
What you may not know is that when you suffer a loss to your building, the local Building Department that has jurisdiction over your property can make a determination that due to local building codes, your property is no longer usable or deemed condemned and must be demolished. Again, because your insurance policy will only pay for direct damage to the building by a covered cause of loss, there will be no coverage for the undamaged portion of the building that you must demolish. In addition to this, there will be no coverage for the cost to demolish the undamaged portion of the building.
Finally, because of changes in local building codes, there may be additional costs to bring the building up to current code. For example, the City Building Department may now require that your building have sprinklers. In addition, federal law may now require accessibility for the disabled such as an elevator, wider hallways and doors, and restroom accessibility. In most cases, none of the above examples would be covered by your insurance policy, unless endorsed to the policy.
This coverage is identified as Building Ordinance Coverage and can only be triggered after a covered cause of loss has been determined. There are generally three parts to the coverage:
•Coverage A – coverage for the Undamaged Portion of the Building
•Coverage B – coverage for Demolition to the Undamaged Portion of the Building
•Coverage C – coverage for the Increased Costs of Construction when reconstructing the building and bringing it into compliance with local building codes
In addition to Coverage A, B and C, you may also extend your Business Income coverage, due to the need to meet new building codes.
Generally, the desired limit for Coverage A is the same as the limit to insure the building for loss by fire. Coverage B can vary greatly due to the type of construction, location of the property and nature of the building occupancy. It typically would be the same limit to demolish provided by your fire policy or 5% of the building value. Coverage C is highly dependent on the age of the building, construction type and potential use. Older buildings have a greater potential for a need to upgrade and the limit of insurance available must be negotiated with the insurance company.
Finally, the price of coverage varies widely, but using a 20% of the fire rate multiplied by the limit of coverage will provide you a ball park premium figure. Please contact our office for a more detailed explanation of the coverage discussed.