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Insurance policies typically are written to return a building to thecondition it was in prior to the loss. However, with older buildingswhere building codes may have changed, an insured could have anuncovered loss for the additional costs to bring the building up tocode. It is not uncommon to find older buildings on farms, so ad-dressing this risk is crucial. This session will review the extent of cov-erage in standard policies versus what building ordinance coverageincludes. It will delve into the three coverages provided and discusssetting limits in depth.

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Building Ordinance:What Does It Matter?

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Building Ordinance:What Does It Matter?

What Went Wrong? Or Did It?

• A building is covered for a limit of $1 million. • The building was partially damaged (60 percent) in a fire. • Local ordinances require upgrading to the current building code when

damage or renovations exceed 25 percent of the building and also require the demolition of the undamaged portion of the building (=60 percent)

• In this case, the total cost for demolition, debris removal, and increased cost of reconstruction totaled $1.5 million.

• You do the math! 2

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What Does Building Ordinance Coverage Provide?

Coverage for:A. Loss to the undamaged portion of the buildingB. Demolition and removal costs of undamaged portion of the

buildingC. Increased costs of repair or reconstruction due to …

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Why the Need for This Coverage?

• The basic form provides only minimal coverage for the enforcement of any ordinance or law.

• It was not designed to restore the structure to a better condition than it was prior to the loss.

• This is the value of building ordinance coverage.

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Why the Limitation in the Commercial Property Form?

• It is the carrier’s responsibility to return the building to the condition it was in prior to the loss.

• Fire insurance policies were never designed to put an insured in a better position than it was prior to a loss; otherwise, the existence of insurance might inadvertently create an incentive to have a loss.

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Coverage A: Loss to the Undamaged Portion of the Building

• A covered loss triggers the application of an ordinance or law If the undamaged portion rendered unusable or condemned

Be torn down, resulting, in effect, in a total loss of the building

• Loss crosses the “major damage” threshold Considers the building beyond safe repair due to age, condition, or previous

compliance with building code

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Coverage B:Demolition Cost Coverage

• Applies only to the demolition and debris removal of the undamaged portion of the building.

• Costs within the local construction market? Demolition of a building and removal of all debris

• Building Journal tool www.buildingjournal.com/commercial-construction-estimating-demolition.html

• Cost of special hazards?7

Demolition Cost Examples

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Increase Demolition CostsConsiderations

• Asbestos: add at least $2–$5 per square foot for asbestos removal.• Landfill and hauling surcharges for debris.• Does the foundation need to be removed? Concrete demolition and

removal increases cost.• Multiple stories increase cost of demolition.• Is excavating required?

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Coverage C: Increased Cost of Construction

• Costs related to making the building compliant with any building codes that have been adopted since the building was originally constructed.

• Ordinances, requirements, and building codes can originate from many sources: local, federal, or state.

• Local jurisdictions are charged with enforcing building code compliance.

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Why Building Codes?

• Most codes were enacted due to natural disasters and catastrophic losses. Examples include: 1871 Chicago Fire

1906 San Francisco Earthquake

1980 MGM Fire, Las Vegas

1992 Hurricane Andrew

1994 Northridge Earthquake

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Building Codes Impact to Insured? Local Ordinances?

• Depending on the age of the building and where it is located (jurisdictional requirements), your building may need the following updates to code: Americans with Disabilities Act (ADA)

Elevators

Electrical and plumbing

Sprinklers

• Parking

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Building Codes Impact to Insured? Local Ordinances?

• Railings and stairways• Seismic retrofit• Sprinkler bracing for earthquake/sprinkler leakage• Wind requirements: roofs/walls• Building height limitation • Number of buildings• Fire safety: smoke, CO detectors

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Gauge the Age and Possible Code Upgrades

• 1950s: four-story, non-sprinklered apartment building in San Jose.• You make the call: Sprinkler system ADA compliance Elevators Seismic retrofit possible Electrical and plumbing upgrades Railing and stairway upgrades Smoke detector and CO detector at a minimum

• What did we miss???? 14

Green Building Ordinance: Maybe?? The Future?

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Proper Building Limit Is Key

• Familiar with the area building codes• Consider Total replacement cost Ordinance coverages B & C

• What about Coverage A?

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Proper Building Limit Is Key

• Discuss with the insured Identify all ordinances

Codes adopted

• Have a conversation with the governing local jurisdiction Your next best friend

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Ordinance or Law CoverageCP 04 46

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One Company’s ProcessUnderstanding Your Carriers

• FIRST! Building ordinance coverage is selected• Included in total building limit, instead of identifying specific limits• The advantage Flexibility for underestimated coverages A, B, C

• Full building limit to apply to all reconstruction activities

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Historical Buildings: Special Considerations

• Buildings that are listed on the National Historical Registry or are located in designated historical areas are subject to different and generally more expensive code requirements.

• Due to these requirements, they also generally take more time to rebuild.

• Partial loss is the key factor.

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Restoring a Building of Nonhistorical Significance

in Sacramento: COST!

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What’s Your Takeaway?• Ordinance limits Properly addressed and determined

Not to be taken lightly

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This is managing the risk.

This is Risk Management.

What’s the Value of Building Ordinance

• Q: What if the local ordinance restricts the height you can rebuild?

• A: Need to Carry the full limit for the existing building Avoid the coinsurance penalty by insuring to value Rebuild at another location where the ordinance issue doesn’t

apply

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What’s the Value of Building Ordinance

• For example, you have a building with a $1 million limit. A fire causes damage to 50 percent of the structure, $500,000. Ordinance requires demolition of the undamaged portion.

• What do you need? Is your client protected?

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What’s the Value of Building Ordinance

• Q: Why doesn’t the underwriter just ask me if I want building ordinance if it isn’t indicated?

• A: Who’s the agent? Who’s licensed?

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