Building Codes are BAD for Your Insureds: Why Ordinance or Law Coverage is Necessary! Christopher J . Boggs, CPCU, ARM, ALCM, LPCS, AAI, APA, CWCA, CRIS, AINS & Independent Insurance Agents of North Carolina
Coverage Gaps Creating the Need for Ordinance or Law Coverage Sources and Enforcement of Building Codes When Damage is Considered “Major” Common Ordinance or Law Requirements and Coverage Limitations Three Commercial Property Ordinance or Law Coverage Forms Ordinance or Law Coverage (CP 04 05) Ordinance or Law - Increased Period of Restoration (CP 1 5 31 ) How to Develop Ordinance or Law Premiums Ordinance or Law Example
Commercial Property Coverage : Exclusion “B.1 .a.” in all three Cause of Loss forms specifically excludes any loss caused by the enforcement of any ordinance or law. There is a small amount of coverage given back for the increased cost of construction in the property form. Business Income Coverage : Combines the limitation in the definition of “Period of Restoration” with the “B.1 .a.” exclusion in the cause-of-loss forms. There is no “give-back” in the unendorsed form. Businessowners’ Policy : Like the CPP it specifically excludes coverage (Exclusion “B.1 .a.”) but gives some automatic additional coverage.
International Building Code Council Federal Government National Electric Code National Earthquake Hazard ADA Codes Reduction Program Life S afety Codes Local J urisdictions Local Building Codes Flood Plain Management Requirements Historical Societies Codes developed by advisory organizations and enforced by local jurisdictional authorities!
At what point must a damaged building be brought into compliance with the current building code ? The answer depends on the jurisdiction. The Percentage Rule : The J urisdictional Authority Rule : Problems can arise in both because of the various definitions of “value.”
To which building codes do the various ordinance or law endorsements apply? What must occur before any of the ordinance or law endorsements will respond? Are there limitations to the coverage?
Ordinance or Law Coverage (CP 04 05) Ordinance or Law – Increased Period of Restoration (CP 1 5 31 ) Ordinance or Law Coverage (BP 04 46)
Made up of three coverage parts: Coverage A – Coverage for Loss to Undamaged Portion of the Building Coverage B – Demolition Cost Coverage Coverage C – Increased Cost of Construction
The CPP only pays to repair the damaged part of the structure. If the remaining undamaged portion of the building must be torn down, that’s the purpose of Coverage A.
Fills the gap between the CPP and Coverages A and C of the Ordinance or Law Coverage form Coverage B : Pays the cost to remove the debris of the undamaged property that must be torn down to make way for the new building. Commercial Property Policy : Pays the cost to repair/rebuild the part of the building that was damaged PLUS the cost to remove the debris of the damaged property from the site. Coverage A : Pays the value of the undamaged portion of the building Coverage C : Pays the increased cost to rebuild the entire structure to current building code – but construction cannot begin until ALL the debris has been removed
Pays the additional cost to bring the structure up to current building code for one of 3 types of losses: The cost to reconstruct the damaged portion of the building; and The cost to reconstruct the undamaged portion of the building; or The cost to remodel the undamaged portion of the building. Also covers real property specifically excluded by the CPP: Cost of excavation, backfilling, and filling Building foundations and pilings Underground pipes, flues, and drains
Three requirements must be met for Coverage C to respond: Building must be intended for similar occupancy; The building must actually be rebuilt to receive payment; Repair or replacement must be completed as soon as practicable – but within a maximum of two years.
Coverage A : Cannot be written on a blanket basis – Scheduled only Coverage B : On a scheduled, per-building basis (Coverage B only) Combined B and C on a schedule basis (requires for CP 1 6 1 5) Single Blanket limit – Coverage B Combined B and C on a blanket basis Coverage C : On a scheduled, per-building basis (Coverage C only) Combined B and C on a schedule basis (requires for CP 1 6 1 5) Single Blanket limit – Coverage C Combined B and C on a blanket basis
Coverage A : Pays the difference between the value of the damaged portion of the building and the total building value as per the limits in the CPP Coverage B : Chosen by the insured. One recommended method: 1 . Determine the “worst-case” scenario (maximum square footage of building still standing that may have to be removed) 2. Convert this scenario to square footage 3. Determine average cost per square foot for demolition and removal 4. Multiply step 2 by step 3 Example : 1 5,000 square feet of 25,000 square foot building may have to be torn down and removed. Cost for such removal is $7.00 per square foot. Necessary Coverage B limit is: $1 05,000
Problems: The difference between the insurance meaning of “replacement cost” and true replacement cost Cost estimators develop the cost to rebuild the structure to current building code Contractor estimations are based on building to current building code Unendorsed CPP won’t pay to bring building to current building code One possible solution : . Choose a percentage of building value (1 1 % to 3%) 2. Multiply the percentage by the value of the building 3. Multiply the answer in “2.” by the age of the building (Like “dollar cost averaging” to account for fluctuations in codes and values) Example : 20-yr-old building valued at $1 million applying the 1 % per year cost average. ($1 ,000,000 * .01 ) * 20 = $200,000 Coverage C Limit
A Business Income endorsement that redefines the “period of restoration” (POR) to include any increase in the POR resulting from the application of a law or ordinance. POR : The period beginning 72 hours following a business-closing loss and ending when the insured returns to operational capability. The unendorsed business income policy specifically excludes any time attributable to complying with an ordinance or law. The insured does not choose a time limit, but increases the amount of coverage to account for the estimated increased time exposure.
Coverage A : Approximately 1 5% of the net building premium (excluding earthquake) Coverage B : Chosen coverage limit divided by 1 00 times net building rate (Coverage B Limit/1 00) * Net Building Rate = Coverage B Premium Coverage C : Chosen coverage limit divided by 1 00 times net building rate (Coverage C Limit/1 00) * Net Building Rate = Coverage C Premium Increased Period of Restoration : Increases BI premium approximately 20%
Building Information: Total Building Value: $2,500,000 Age of Building: 1 5 years Old 1 2-Month Business Income: $3,500,000 Occupancy: Manufacturing Square Footage: 25,000 J urisdictional Law: 50% of Square Footage Coverage Information (w/o Ordinance or Law): Building Coverage $2,500,000 Business Income Coverage: $2,450,000 (70% Co-insurance) Estimated POR: 8 months Fire Stop Wall 00’ 1 1 Story - 25,000 square feet – Manufacturer – 1 5 years Old – 8 month POR 250’ With Ordinance or Law Coverage: Coverage A: Included in CPP Coverage B: $62,500 Coverage C: $375,000 Increased POR (CP 1 5 31 ): Yes / $3,500,000 BI
CPP Pays: Cost to Remove Debris of Damaged Part Cost to Rebuild Damaged Part “as is” FIRE DAMAGE – 00’ Undamaged Part – 1 1 3,000 S quare Feet 1 2,000 Sq. Ft. 1 Story - 25,000 square feet – Manufacturer – 1 5 years Old – 1 2 month POR 250’ Ordinance or Law (CP 04 05) Pays: Value of Undamaged Portion (Cov. A) Cost to Remove Debris of Undamaged Portion (Cov. B) Increased Cost to Rebuild ENTIRE Structure to Current Building Code (Cov. C)
Loss Information: Square Footage Damaged: 1 3,000 sq. feet Value of Real Property Damaged: $1 ,300,000 Undamaged Square Footage: 1 2,000 sq. feet Value of Undamaged Property: $1 ,200,000 Actual Period of Restoration (POR): 1 2 months Actual Business Income Loss: $3,500,000
Claim Comparison: Paid w/ CPP and Paid using Loss Type Actual Loss both Ordinance or unendorsed CPP Law Endorsements and BI Only Building Damage: $1 ,300,000 $1 ,300,000 $1 ,300,000 Value of Undamaged $1 ,200,000 $1 ,200,000 0 Portion: (1 ) Demolition Cost Total (2) : $1 25,000 $1 25,000 $65,000 Increased Cost of $300,000 $300,000 $1 0,000 Construction: Business Income: (3) $3,500,000 $3,500,000 $2450,000 Total $6,425,000 $6,425,000 $3,825,000 (1 ) Remaining structure must be torn down due to the local building code requirements. (2) Total cost of demolition and removal includes damaged and undamaged parts of the building at $5.00 per square foot. (3) Period of Restoration is 1 2 months as a result of additional time required to comply with the local building codes. Without the application of building codes, the period of restoration would have been 8 months.
Recommend
More recommend
