Property Insurance and Building Codes

Fire, lightning, windstorms, hail – it is easy to picture how these events can damage a building. Standard commercial property insurance policies will cover the damage from these sorts of losses.

After the loss, the building reconstruction process can become complicated. Reconstruction can take longer than anticipated, and at times costs more than the original construction. Fortunately, the insurance industry has tools that can be used to estimate reconstruction costs and help with the determination of property insurance limits.

However, choosing the right amount of property insurance is only one of many important decisions that must be made when insuring a building. Unknown to many property owners, the standard commercial insurance policy may not cover all of the costs a building owner may incur to prepare a damaged building for occupancy, even after what would seem like a straightforward or common loss.

Building codes and unexpected costs
Building codes and ordinances are in place to establish guidelines for building design and construction. Building codes address many aspects of construction, from construction materials to fire suppression systems, exits, and accessibility for disabled individuals.

During initial construction, buildings are designed and built to comply with the codes that are in place at the time. These building codes continuously change, and this evolution of the building codes can leave building owners surprised at additional costs that may be uninsured.

Many communities have ordinances that apply to a building that has been damaged. For example:

  • An ordinance may require that the severely damaged building (ex: more than 50% damaged) needs to be demolished and rebuilt from scratch, as opposed to being repaired.
  • An ordinance may require that reconstruction brings the building up to current codes. For example, an older building, built initially up to code and without sprinklers, is severely damaged. Before the building can be reoccupied, the building must be retro-fitted with sprinklers.

In following with the sprinkler retro-fitting example above, ordinances may also include required upgrades to HVAC or plumbing systems, bathrooms, elevators or building exits before a damaged building can be reoccupied.

So how does the standard commercial property insurance policy respond to the above scenarios? In the first scenario, an unendorsed, standard commercial property policy would not pay to demolish the undamaged portion of the building, nor would it pay to rebuild the undamaged portion of the building.

In cases where the ordinance requires building upgrades, a standard commercial property insurance policy would not cover upgrades such as retro-fitting for sprinklers, adding exits or modifying bathrooms for ADA compliance.

Insurance Solutions: “Ordinance or Law” coverage
Fortunately, the commercial property insurance policy can be endorsed to provide coverage for the above scenarios. “Ordinance or Law” coverage can be added to provide coverage for demolition and rebuilding of the undamaged portion of the building. Ordinance or Law coverage can also be added to pay for increased costs of construction, such adding sprinklers.

Although these coverages may seem more important to owners of older buildings who have been “grandfathered in” with respect to certain building codes, codes change fast. Even owners of newer buildings should consider purchasing Ordinance or Law coverage to protect themselves from unexpected financial losses.