Building Ordinance Coverage:
What’s Your Responsibility?
Your building is covered for a limit of $1 million. The building was partially damaged (60%), in a fire. Local ordinances require upgrading to the current building code when damage or renovations exceed 25% of the building and also require the demolition of the undamaged portion of the building. In this case, the total cost for demolition, debris removal, and increased cost of reconstruction totaled $1.5 million. You do the math! What went wrong?
Building Ordinance Coverage
Building ordinance coverage provides three basic coverages: A. loss to the undamaged portion of the building, B. demolition and removal of the undamaged portion of the building and C. any increased costs of repair or construction due to enforcement of building codes. This coverage needs to be added to the policy as the basic form provides minimal coverage for the enforcement of any ordinance or law. The value of Building Ordinance Coverage is to provide coverage for these costs.
Coverage A: Loss to the Undamaged Portion of the Building
This portion of the coverage responds when a covered loss triggers application of ordinance or law relating to a partial damage to a building. If the undamaged portion of the building is rendered unusable, or condemned, by an ordinance, and has to be torn down, a total loss of the building is incurred.
Local jurisdiction will require the undamaged portion be demolished when the loss crosses the “major damage” threshold as defined by the jurisdiction. This is when the jurisdiction considers the building beyond safe repair due to age, condition, or previous compliance with building code. Jurisdictions normally use state law to decide when this point of major damage has been breached, so definitions can vary.
Coverage B: Demolition Cost Coverage
This coverage applies only to the demolition and debris removal of the undamaged portion of the building. It is important for you to know the costs within the local construction market for demolition of a building and removal of all debris from the site and at what point will the jurisdictional authorities require the building to be torn down, in order to establish an adequate limit for this coverage.
Building Journal offers a very useful tool to quickly estimate the cost of residential and commercial demolition projects in over 160 U.S. cities:
Keep in mind the valuation date of the data, and that this doesn’t include the cost of addressing any special hazards, such as asbestos, lead, etc.
Coverage C: Increased Cost of Construction
This coverage is for making the building compliant with any building codes that have been adopted since the building was originally constructed. Ordinances, requirements, and building codes originate from many sources: local, federal or state. The emphasis is on local codes, as local jurisdictions are charged with enforcing building code compliance.
Proper Building Limit is the Key
To develop an adequate building limit, you must consider not only the replacement cost, but also the additional costs of building ordinance coverages B & C. Discuss these with the insured to identify all ordinances that have been implemented since the building was constructed. This may require a conversation with the governing local jurisdiction. When Building Ordinance Coverage is selected, Sequoia Insurance includes the needed limits as part of the total building limit, instead of identifying specific limits. The advantage of this method is that it allows flexibility for the insured in the event that any of the coverages A, B, or C have been underestimated. The insured has the full building limit to apply to all reconstruction activities. This is managing the risk. This is Risk Management.