Forced To Rebuild to Code?

Building Ordinance or Law Coverage Can Protect You

A fire breaks out in your building, crawling the walls and blowing out windows before the fire department axes through the side door to extinguish it. There’s structural damage, but fire is a covered peril on your commercial property policy (whew!).

Your insurance responds to the claim without issue and you’re on your way to a fresh rehab – or so it seems. You apply for the construction permits to rebuild, but the city says your building isn’t up to code. Even though you’re forced to rehab because of the fire (something you hadn’t planned), you’re now faced with city requirements to rewire and replumb the entire building, even the undamaged parts.

At least you’re insured; they’ll have to pick up the cost… right?

Wrong. The insurance company won’t pay for the full cost to rewire and replumb the whole building, even though that’s what your city is requiring, because some of it is undamaged property. Now you’re stuck with major damage to your wallet, in addition to your building.

But there are steps you can take to protect yourself. Learn how the building ordinance or law endorsement can help keep your business budget from going up in smoke.

Who needs building ordinance or law?

Any commercial property owner should consider this endorsement, including owners of any of the following:

• Condominiums
• Apartments
• Storefronts
• Malls or strip mall property
• Office buildings
• Storage or warehouse buildings
• Municipality buildings
• Hotels and motels
• Older buildings

If you own a building that’s zoned for specific purposes in a community governed by building codes, a code violation could make your peril even more perilous.

Types of building ordinance or law coverages

The main purpose of any commercial property insurance is to return you to the same condition you were in before the loss (to “make you whole” again). In the case of a catastrophe like a fire, you’re looking at many moving parts to get you back to whole again. But a surprise violation like city building codes violations is an insurance gap that adds more fuel to fire rather than helping you escape unharmed.

A building ordinance or law endorsement extends your commercial property policy coverage over parts of your building that are undamaged by a covered peril (such as a fire) but must be repaired or upgraded to satisfy a community building code.

Building ordinance or law endorsements to consider are:

• Loss to an undamaged portion (coverage A)
• Demolition cost (coverage B)
• Increase cost of construction (coverage C)
• Post-loss ordinance

Loss to undamaged portion coverage

Even when the cause of the catastrophic claim is obvious, you’ll have to work with the insurance company to figure out how much damage was done to your business property. Once you agree on what’s been damaged (and the original cause of the damage), you’ll begin the restoration process.

But what happens if only parts of the property are damaged? Ironically, in the case of a building ordinance or law limitation, that news could be worse than having your property declared a total loss.

For example, let’s say your insurance company has determined that 60% of the structure of your building is damaged due to the fire. Insurance will cover the restoration of the fire-damaged parts. When you’re applying for construction permits, the city informs you that local building codes require that all structures damaged beyond 50% must be destroyed and completely rebuilt, not just repaired. The limit on your standard commercial property policy is $400,000. Is it enough to demolish and restore to what you had before? Most commercial property policies include language about building ordinances or laws, but the limits aren’t very high (some are as low as 5% of the policy limits).

The contractor quotes you $80,000 to rebuild the undamaged parts of your building. Without a building ordinance or law endorsement, your property policy might pay 5% of the $400,000 limit. That’s a $60,000 coverage gap out of your own pocket. Factor in coinsurance on your property and you’re already on a downward slope because that percentage will cut into the coverage limits, too.

A loss to an undamaged portion building ordinance or law endorsement on your existing property policy can help to close the coverage gap. Think in terms of a worst-case scenario weighed against current and future market costs for labor and materials.

Demolition cost coverage

Before you think the gap is closed – the building isn’t going to tear itself down and clean up afterward. You might have some coverage for the cost to rebuild the damaged portion, but not the cost to demolish and remove the debris for the undamaged parts. But will it cover your overall costs? You guessed it – it depends on the wording and limits.

The demolition cost endorsement covers the cost of demolishing and removing the debris of the undamaged portion of the building if building ordinance or law requires it. Without a demolition cost endorsement, you might be forced to share the loss between other restoration expenses (like rebuilding walls), leaving you with little or no coverage for demo.

Again, think in terms of a worst-case scenario when pricing cleanup costs such as machinery, labor, and disposal fees. A demolition cost building ordinance or law endorsement can help with the gap. Your insurance professional can help you choose a dollar amount that’s right for your situation.

The increased cost of construction coverage

Even if your building isn’t forced into a complete demo, you might end up having to rehab your property to code anyway.

Let’s say the same example applies but your building has only 35% structural damage. You apply for construction permits, but the city now requires you to upgrade the electrical and plumbing throughout your building. That estimate comes in at $60,000. A standard commercial property policy might offer coverage, but it could be as low as 5% of your policy’s upper limits. Using a $400,000 limit, you’re left with $40,000 to finance on your own.

An increased cost of construction building ordinance or law endorsement can help limit your out-of-pocket expenses. Work with your insurance professional to determine the amount that’s right for your property, factoring in rising costs of materials and labor.

Post-loss ordinance coverage

There’s a lesser-used insurance coverage option, post-loss ordinance or law coverage, which can help if you anticipate a lengthy or complicated claims process. And when it comes to commercial property restoration, claims can take a while.

Building ordinances or laws endorsements offer coverage only for losses that happen while the policy is in force. If new laws kick in after the loss event but before your rebuild is complete, you could come up short if you don’t have post-loss coverage. 

Let’s fast-forward to our fire example. The restoration is taking a little longer than anticipated. The insurance company, contractor, and city departments are trying to resolve an issue with the materials used for restoration and it’s pushed the project over a year. The city passes new building ordinance laws. You were covered for the costs associated with complying with the laws that were in effect at the time of the fire, but those laws no longer apply – which means your coverage no longer applies. It could happen (and the fact that post-loss ordinance coverage is available to protect against this very situation means it has happened).

It’s not part of the usual A, B, or C coverage endorsements, but post-loss ordinance coverage is worth asking about if you anticipate a lengthy restoration or your community experiences frequent law changes.

A standard property policy can leave you at risk

Find out what your local building ordinance or laws require to stay in compliance. Depending on the age and value of your commercial property, you might be looking at a serious cash investment to top off an already stressful situation.

• Ask your insurance professional if there are any time limits put on the restoration project. Language in the insurance policy might limit your project to two years for completion. If you need more time than that, you’ll have to get an agreement in writing.
• Be clear about coinsurance and deductibles on your current commercial property policy. Coinsurance percentages can complicate the calculations that insurance companies use to determine how much cash they’ll cover.
• Ask if your coinsurance clause applies to the building ordinance and laws endorsement. Sometimes it does, and sometimes it doesn’t. If it does, make sure to review your overall limits to insure against modern-day materials and labor costs ($20,000 won’t buy as much 10 years from now).
• Building ordinance and laws coverage will only extend the coverage on your commercial property policy. If you’re not covered for specific perils, an endorsement won’t cover those excluded perils either.
• Building ordinance or laws coverage generally excludes coverage for reasons related to pollutants, contaminants, or detoxifying (such as mold, fungus, bacteria, wet or dry rot).
• You might be shocked at the cost of some of the upgrades you need to bring your building up to current codes, such as installing sprinkler systems or ADA-compliant ramps and doors. Schedule coverage amounts with these types of upgrades in mind.

Your insurance professional can help

Ping your insurance professional about adding building ordinance or law coverage to your existing property policy. A fire or other covered catastrophic event may have caused your initial insurance claim, but that doesn’t guarantee that you’ll be financially fireproof when it comes to the repairs. You might have some coverage – but is it enough to compete with current (and future) market prices? That’s not the question you want to be asking when the demo crew shows up.

A building ordinance or law endorsement is one more layer of protection you can invest in to make sure your business budget isn’t on the demo end of a wrecking ball.

This content is for informational purposes only, should not be considered professional, financial, medical, or legal advice, and no representations or warranties are made regarding its accuracy, timeliness, or currency. With all information, consult with appropriate licensed professionals to determine if implementing any recommendations would be in accordance with applicable laws and regulations or to obtain advice with respect to any particular issue or problem.