Let’s say you own a property that suffered extreme damage – enough that you’re going to need to rebuild or at least repair extensively. (We hope this doesn’t happen, but unexpected catastrophes occur every day.)
Now, you already have property insurance, so you might think your costs of rebuilding are covered. For the most part, you’d be correct. But in the time since you created that policy, dozens of new local, state, and federal laws have been passed regarding building codes.
Which means that you may now have to rebuild according to a much more expensive set of restrictions than you previously thought when you drew up your policy.
Without Building Ordinance Coverage, you’re going to wind up paying for the additional costs out of pocket. With it, you’ll be able to cover the gap between what you thought it would cost you to repair the building when you were dealing with the building codes of 1995 – and the costs of repairing the building according to the building codes of 2015.
Building Ordinance Coverage comes in three types, handily labeled A, B, and C.
Coverage A: Coverage for Loss to the Undamaged Portion of a Building
Let’s say your building was only partially damaged by a fire. Your property insurance covers the costs of repairing the damaged portion, but it turns out that since your property was built, the undamaged portion of the building is no longer up to code. It is determined to be unusable, or condemned, even if it was perfectly acceptable before the damage occurred.
Coverage B: Coverage for the Cost of Demolition
All right, so you’ve been told the undamaged portion of your building has been condemned and must be torn down. Coverage B pays the cost of demolishing the undamaged portion of the partially damaged building.
Usually, the claims adjuster will agree to an amount based on local construction costs for demolition, the amount of the undamaged portion of the building, and any special hazard issues like asbestos insulation.
Your coverage will be determined by estimate of the worst case scenario (approximately 50% of the structure) multiplied by anywhere from 2 to 5. There is no default fixed limit for coverage – you decide on the limit you feel is best with your policy provider. It’s usually best to plan for the worst-case scenario, particularly if you know that your building would not be compliant with the current ordinances if it were re-evaluated.
Coverage C: Coverage for the Increased Costs of Construction
This coverage is excluded under the standard property policy, which means that if you find yourself in this situation where you must repair, rebuild, or completely renovate the undamaged portion of your building, you will most definitely not be covered for the full costs of construction. Without this coverage, your current policy does not offer a “true” replacement cost value.
Your building insurance policy will have been calculated according to the ‘true replacement cost value,’ but that value specifically excludes having to update for new ordinances. Let’s say that your building was built in 1950, and since then there have been new standards and codes passed for wiring for electricity. Your insurance will cover the costs to adequately wire the portion of the building that was damaged, but you will have to update the entire building – and the cost to update the undamaged half will come out of your pocket without this coverage.
Even if you and your insurer are both aware that in the case of severe damage, you will have to tear the entire building down and start anew, your building insurance will not cover the costs in full – unless you have Building Ordinance Coverage C.
The more informed your agent is about the status of your structure, the better, so it’s best to look up your local, state, and federal ordinances and determine just how out of date your building would be if it were re-evaluated today. The more information you have, , helping you avoid paying out of pocket for expenses required by law.
You may wish to look into coverage for an Increased Period of Restoration. As you surely know if you’ve ever had to comply with building ordinances before, there are often delays in repairing or replacing the undamaged portion of the building while all the paperwork goes through. This additional coverage allows you to lengthen the period of restoration without losing business income.
Increased Period of Restoration coverage can be a little tricky to navigate depending on your state and county laws, the type of building you own, and how out-of-date it is in regard to current ordinances, so we highly recommend you contact an agent to determine the correct amount of coverage for you.