Ordinance or Law for City Homes.
THE IMPORTANCE OF ORDINANCE OR LAW COVERAGE
Protecting a multi-family property – apartment buildings, condos, co-ops, brownstones, and mixed-use structures – in the event of fire damage, storms and other catastrophic events requires Property insurance that goes the distance. This includes not only making sure the building is insured for its replacement value but that coverage also exists to respond for loss to the undamaged portion of the structure, increased demolition costs, and the increased cost of construction to comply with local law ordinance, statutes or building codes.
The ABCs of Ordinance or Law Insurance
Sometimes overlooked, Ordinance or Law coverage is a very important coverage for property owners to consider. Following is a general overview of this valuable coverage.
Let’s say a fire damages 51% of a six-unit condominium. The county mandates that the entire structure come down and be rebuilt, even though there was no damage to the other 49% of the structure. Because 49% was not damaged by a covered cause of loss, the insurance company will not pay to rebuild it unless the insured has Coverage A Ordinance or Law. This will provide the coverage needed for the loss to the undamaged portion of the building, typically up to the total limit scheduled in the Property policy. It’s important to note that as this coverage directly relates to insuring the building at proper values when replacement cost is written, it is paramount that the property owner covers the building at 100% of the replacement cost value.
Now that the undamaged portion of the building has to be removed, there is the cost to demolish it and remove the debris so that reconstruction can begin. The owner has to pay the demolition costs unless Coverage B Ordinance or Law is included with the Property policy since 49% of the building was not damaged by a covered cause of loss. The Property policy only responds to demolition and debris removal of the damaged portion of the building.
To determine the limit for Coverage B, the property owner should evaluate potential costs associated with demolishing the undamaged portion of the building and hauling the debris away. The following should be considered: how the debris will be hauled away and by whom, the distance for the debris to be transported, projected cost for debris disposal, and any additional expenses such as equipment rental, among other factors.
This coverage includes the recovery of costs related to making the building compliant with current building codes. As this coverage is typically not included under the standard Property policy, an insured may not be insuring the building to a true replacement cost value without adding Coverage C Ordinance or Law. For older buildings that may not be in compliance with certain aspects of the current building code or local ordinances, these increased costs can be substantial. A building that was built to code at one time may not be in compliance at a later date. Building codes are continually changing—requiring features like new or improved sprinkler systems, better wiring, and disabled accessibility, for example. In addition, more laws are increasingly being enacted relative to construction practices in earthquake, hurricane, and flood zones.
It’s not only important that Coverage C is included for these older buildings to help bring them up to code after a loss, but also that the amount of coverage is adequate to address the increased cost of construction as a result of current local statutes.
According to Adjuster’s International Disaster Recovery Consulting, compliance with ordinances and laws after a loss can add 50% or more to the cost of a claim. It’s important to take a proactive approach in understanding how Property insurance works and what additional coverages are available to close potential gaps and exclusions. With Ordinance or Law coverage, multi-family properties will be better protected in the event of a property loss.
Ordinance or Law Coverage A & B at Work
An apartment building caught fire, damaging 75% of the structure. The remaining 25% of the building was condemned by the town and deemed to be unusable. The insured had Ordinance or Law Coverage A, which enabled the client to receive the full building limit for the loss. However, the property owner also needed to bear the cost of tearing down the remaining 25% of the building deemed undamaged yet unusable. Thankfully, the client’s Property insurance also included Ordinance or Law Coverage B, which covered the cost to tear down the undamaged portion of the building and remove the debris.
The Need for Ordinance or Law Coverage C
A fire destroyed 40% of a $10 million condominium structure. The local municipality required that the building be brought up to code, including the undamaged 60% of the building. Replacement Cost coverage on the Property policy would not pay the combined $1 million ($400,000 for the damaged portion of the building and $600,000 for the undamaged portion) to bring the building up to code, as the property owner did not have Ordinance or Law Coverage C. Note: Even if the entire building had burned to the ground and the portion of the replacement cost associated with bringing the structure up to code were $1 million, the policy would pay $9 million for the loss and would not pay for the increased cost of construction due to the new codes. Property insurance with Replacement Cost coverage is for direct physical damage, and the requirement to meet new codes is not direct physical damage.
About City Homes
Distinguished’s City Homes Insurance Program provides a package product designed for small urban multi-family buildings in designated cities across the country. Among the enhanced features included in the Property portion of our City Homes program is Ordinance or Law Coverage A, B, and C.
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