Your insurance may cover your losses, but will it be enough to meet new building code requirements if you rebuild?
A good insurance program will protect your business property from loss due to fire, theft, vandalism and more. But without certain important coverages, your property coverage could leave you short of the funds needed to rebuild and recover.
Do you own your business premises? Any building more than a few years old might not comply with current building codes, as well as additional regulations such as the Americans with Disabilities Act.
When property damage forces you to rebuild or remodel, you most likely will have to bring your construction up to current codes. Most property policies exclude coverage for loss due to complying with an ordinance or law regulating construction, repair or occupancy of any building.
So even if your building is properly insured to value, your policy will not cover the additional costs of bringing it up to current codes.
To make matters worse, after a portion of your building is damaged, local authorities will likely require you to repair undamaged portions of your building to bring them up to current codes. And since remodeling usually costs more on a square-foot basis than new construction, these repairs can be costly.
If a covered peril damages your building, or any part of it, you’ll probably have some trash and debris to remove before repairs can begin. Will your insurance policy cover these costs? The typical commercial property policy provides debris removal coverage as an “additional coverage” over and above your property policy’s limits. It will “pay your expenses to remove debris of covered property caused by or resulting from a covered cause of loss” and usually limits coverage to 25 percent of “the insurer’s liability for the direct property loss by a covered cause of loss, plus any applicable deductible (unless an additional debris removal limit is shown in the declarations),” according to Adjusting Today.
If the total of the direct physical loss costs and debris removal costs exceeds your policy limits, or if debris removal expenses exceed the debris removal “additional coverage” limits, most policies will provide an additional $10,000 in debris removal coverage per incident. In some instances, however, debris removal costs could greatly exceed the cost of the direct property damage. Debris removal can cost more than you might think. If your building is older, it could contain lead paint, asbestos and other contaminants that require special handling and disposal by law.
You might also have debris removal costs even without any covered property damage. For example, a flood or windstorm could deposit debris from another property onto yours. In that case, the debris does not come from “covered property” under the policy, which would not cover removal costs. Exceptions might exist when the debris itself is causing damage to covered property.
Increased Cost of Construction
A policy endorsement, or addition, called “ordinance or law coverage” or “increased cost of construction coverage” can help you cover some of the unexpected costs of disaster recovery.
This endorsement provides three types of coverage when laws or ordinances require you to spend more on reconstruction.
• Coverage A covers you for the cost of making required repairs to the undamaged portion of a building.
• Coverage B covers you for the costs of demolition and debris removal.
• Coverage C provides coverage for increased costs of construction, or your actual costs of bringing the damaged portions of the building up to current codes.
The standard property policy covers none of these costs, so without ordinance or law coverage, the building owners would have to pay these expenses. You can select the amount of additional coverage you need, which will vary with the age of your building, the stringency of applicable building codes, and your exposures to covered causes of loss, such as fire.
To obtain ordinance or law coverage, your property policy must be written on a replacement cost basis, rather than actual cash value basis. If you decide to relocate rather than rebuild after a total loss, your replacement cost coverage would pay the replacement cost of your building, but the increased cost of construction coverage would not apply, since no reconstruction actually occurred.
Does your property policy have these endorsements? If you’re not sure, give us a call.