When a building is insured, a policy written for “replacement cost” provides for the repair or replacement of the damaged portion of the building with like kind and quality of materials. That’s the good news!
The bad news can be that, when a building suffers damage, there may be one or more local building code ordinances that come into play. The building ordinance in many cities may say that, if a certain percentage of a building is damaged, the undamaged portion of the building must be demolished and thereby requiring the entire structure to be rebuilt. For example, if the city’s threshold is 50% and 60% of the building is damaged the city can require the undamaged 40% to be demolished so that the entire building needs to be replaced. Even if the limit of insurance was adequate to replace the entire building, the standard replacement cost insurance will not pay to tear down and replace the undamaged portion.
Another example is that, maybe an undamaged portion of the building doesn't need to be demolished, but in order to rebuild even the damaged portion, an elevator, or handicapped accessible entryways and rest rooms, or fire suppression sprinklers may need to be added to bring the building up to code.
These additional costs are not covered by the standard Building and Personal Property Coverage form found within most commercial policies. However, they can be covered with the addition of Ordinance or Law Coverage.
Ordinance or Law Coverage has 3 components:
· Coverage A – applies to the loss of value to the undamaged portion of the building
· Coverage B – applies to the cost of demolition to the undamaged portion of the building
· Coverage C – applies to increase expenses to
o Replace the property to comply with current building, zoning, or land use ordinances
o Repair the undamaged property to comply with current building, zoning or land use ordinances
o Or to reconstruct or remodel the undamaged portion so that it complies with current building, zoning or land use ordinances
Properly structuring Ordinance or Law Coverage within your commercial policy can make the difference between being forced out of business due to the inability to pay for these additional costs that result from a covered loss, or enabling your business to spring back after a loss.
Ordinance or Law Coverage is available in most homeowner’s policies as well. If there was a covered loss to your home, would your city require you to upgrade the plumbing or electrical? Things like this can be very expensive and the upgrade can only be covered by Ordinance or Law Coverage.
Review your policy to make certain that your insurance is properly protecting you. If you have questions, call us at 800-220-5582 or contact us on the web.