IIABNY rents office space in a 94,000 square foot building, located in the Town of Dewitt and constructed in 1990. A Massachusetts-based trust owns it. As a former commercial insurance underwriter, I sometimes ponder the “what-ifs” of a potential catastrophe. For example, “What if this building was destroyed or substantially destroyed? I wonder if the owners have the right insurance?”
I don’t get invited to many parties.
Still, while this building is attractive, comfortable and in good condition, it’s 24 years old. A lot can change in 24 years. Building codes, for example. I’m neither an architect nor an engineer; my specialty is reading mind-numbing insurance policies, not mind-numbing building requirements. However, if I was to bet, I’d bet that, if the owners had to rebuild part or all of this building, they’d find a few new code requirements they’d have to meet.
Which brings us back to the insurance question (as do, let’s face it, all issues.) Does the owner of this building have the proper coverage for this situation? I don’t have a clue. Their coverage is a private matter between them, their broker and their insurer. Hopefully, though, they’ve considered this provision in the ISO Causes of Loss - Special Form, CP 10 30 10 12:
1. We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.
a. Ordinance Or Law
The enforcement of or compliance with any ordinance or law:
(1) Regulating the construction, use or repair of any property; or
(2) Requiring the tearing down of any property, including the cost of removing its debris.
This exclusion, Ordinance Or Law, applies whether the loss results from:
(a) An ordinance or law that is enforced even if the property has not been damaged; or
(b) The increased costs incurred to comply with an ordinance or law in the course of construction, repair, renovation, remodeling or demolition of property, or removal of its debris, following a physical loss to that property.
The unendorsed ISO Commercial Property Coverage Part will pay for the repair or replacement of a building so that it is restored to its original condition. It will not pay for improvements required by law. If the town government says the wiring must be upgraded, the insurer will not pay for the cost of the upgrade. If the town says too much of the building was damaged and the whole thing needs to be demolished, the insurer will not pay for that. Also, no coverage for hauling away the rubble from demolishing the undamaged part of the building.
A few thousand here, a few thousand there; after a while, we’re talking about real money.
There are remedies. ISO has published two endorsements to deal with this exposure: Ordinance or Law Coverage, CP 04 05 10 12 (for loss resulting from direct damage to property,) and Ordinance or Law – Increased Period of Restoration, CP 15 31 10 12 (for loss resulting from the loss of use of the building.) The direct damage endorsement covers the loss of value of the undamaged portion of the building when local codes require it to be demolished. It also covers the cost of demolition and the increased cost of construction resulting from having to meet new codes. The time element endorsement increases the amount of time for which the policy will cover lost income to account for the extra time needed to bring the property up to code, including the time needed to demolition the undamaged portion and remove the rubble, if need be.
Both endorsements contain a number of conditions, limitations and exclusions, so the insurance producer should review them carefully with the building owner. Also, the owner must select limits of insurance for demolition cost and increased cost of construction, so special attention must be paid to selecting adequate amounts.
I don’t know how often building codes change. However, some are probably changing right now, what with memories of SuperStorm Sandy being so fresh. The ordinance or law exposure can be a very serious one. Every insurance producer and property owner should give it some serious thought.
And, to be clear, while I ponder disasters, I would much rather one not befall the owners of IIABNY’s office building. Particularly when I’m writing blog posts at a desk located inside it. Just sayin’.
For more information on property insurance, visit the Property page in the Member Answer Center of the IIABNY Web site.