Every day we encounter people struggling to understand what their insurance policies really do for them. Those encounters are why we make educating our clients such a large part of what we do. As a business owner, there are certain thing that you should know when recovering from a loss. If your commercial building becomes damaged through natural disaster or other such events, you most likely will want to begin the process of reconstructing your building in order to resume or continue business operations. A number of structures after suffering damage may require some of their systems, such as electrical, heating, ventilating, air-conditioning (HVAC), and plumbing, be upgraded to meet city/town codes. Many communities have building ordinances requiring that a structure with significant damage of a specified extent (typically 50%), must be demolished and rebuilt rather than simply repaired.
With standard commercial property insurance, the loss of the undamaged portion of the building, cost of the demolition to the undamaged portion, as well as the increased cost of rebuilding the entire structure is most likely not covered. Don’t worry. Coverage for these kinds of loss exposures can easily be obtained via a Building Ordinance or Law endorsement.
Let’s look at an example:
Suppose a fire causes destruction to more than 50% of your Commercial Building. Many cities and towns require any building which sustains significant damage to more than 50% of the structure must be torn down and rebuilt. If your building is located in one of these places then you would need to tear down the undamaged portion of your building and rebuild from the ground up. Even if you have maintained your property and have “Building Replacement Cost Value” you may not be fully covered for the reconstruction. The insurance policy pays for repairing or replacing the damaged portion of the structure to its original state. Upgrades due to building codes changes or replacing the undamaged portion of the property due to town ordinances are not covered unless additional coverage is purchased.
This is because Standard Property insurance policies generally have an “Ordinance or Law” exclusion, which means that the policy covers the building as it exists, but not the cost to upgrade the building after a major loss. The upgrade will only be covered if you purchase an “Ordinance or Law endorsement” for your property. Even if your property policy offers some “built-in” Ordinance or Law protection, the amount of coverage is most likely minimal and would not be sufficient to cover a major loss.
All too often we hear the common misconception that “this coverage is only important for older buildings.” UNTRUE! New legislation is always in the works and laws change often, meaning newer buildings can be affected.
How Ordinance or Law Coverage works:
Part A: Coverage for the undamaged part of your buildingcovers the cost to replace an undamaged portion of your building that is required to be torn down and rebuilt because of a local ordinance.
Part B: Demolition cost covers the demolition expenses for an undamaged portion of a building that has to be removed.
Part C: Increased cost of new construction covers the cost for the upgrades you might need in the event of a loss. The limit you set for Part C requires serious consideration and talking with a contractor may be helpful in determining the appropriate level of protection.
For more information on Ordinance or Law Coverage, including the information found above, please visit the links listed below. You may also call or stop by one of our eight FBinsure offices located throughout Southeastern Massachusetts.