Business owners, standard property insurance policies will not pay for the additional cost to repair a building to comply with local ordinances or laws. These local codes are continually being updated and may require updates to a structure’s wiring, plumbing, framing, sprinklers, and handicap accessibility. These extra costs can increase recovery expenses by fifty percent or more*. Certain policies may include a limited amount of ordinance and law coverage but it is typically capped at $10,000. Depending upon local codes, the damage endured, and the building methods of each structure, this can present a significant coverage gap.
Policy Limitations
Standard commercial property insurance policies are designed to cover the cost to repair or rebuild a structure to the state it was before the damage. Policies are so clear on this point, ordinance and law costs are excluded in several of their sections. These exclusions can even apply to business income insurance. The reason behind these limitations is because it is not feasible for an insurance company to be aware of all local building ordinances in all localities and adjust coverage accordingly. That responsibility falls upon each client.
Thus, if ordinances or laws increase the cost to repair or rebuild a structure, those additional expenses are not covered unless addressed separately in the policy. Consider a few common situations where local ordinances or laws increase recovery costs.
In many localities, if a structure is damaged beyond a certain point, typically fifty percent, code requires the entire building be demolished and rebuilt. Complying with such code would require expense to demolish the remaining structure, haul it away, and rebuild. However a standard property policy would only pay to rebuild the portion of the building damaged.
When repairing damaged buildings, permits are pulled, and repairs must comply with newer, more expensive standards.
Building construction or repair can be delayed due to compliance with ordinance or law, increasing the length of time the business is idle and therefore increasing the loss of income.
Ordinance and Law Coverage
The best way to protect your business against these increased costs is to carry ordinance and law coverage. This protection can be added to commercial property insurance. As an aside, it is also available for homeowner’s insurance policies. This coverage is provided in three parts.
1. The Undamaged Portion of the Building
Should a building be partially damaged, as previously mentioned the local building department may require the building owner demolish the undamaged portion of the structure before rebuilding. This coverage part pays to rebuild that undamaged portion. This coverage part does not increase insurance limits, but simply expands coverage to allow for this cost. Adequate insurance limits must be maintained on the commercial property policy.
2. Demolition Costs
Continuing with the same loss scenario, demolition coverage pays to demolish and clear the site of undamaged parts of the remaining structure. Unlike the first coverage part, the client will specify an additional amount of insurance here.
3. Increased Cost of Construction
If building code changed since the building was originally constructed, this coverage part pays for these mandatory enhancements that bring it up to code. Just like the previous coverage part, the client will specify an additional amount of insurance here.
Cost
The next question is what this increased protection will cost. The answer is straightforward since the expense is similar to that associated with increasing the insured value of a building. Thus, if a building is insured for $100,000 and it costs $500 a year to protect it on a property insurance policy, use the same ratio to estimate the cost of ordinance and law coverage. For example, if you want an additional $20,000 of ordinance and law coverage, it would cost around an extra $100 per year ($500 / $100,000 x $20,000 = $100).
Questions on ordinance and law coverage for your specific situation? Contact your Bankers Insurance agent. We can explain your insurance policies in clear terms. Not a client of ours? Let us earn your business! Each client is assigned a personal agent in our office, given their email address, and provided a phone number that rings right on their desk.
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