As a commercial building owner, you may think your insurance policy provides all the coverage needed so long as there is replacement cost coverage in place. There is a lot more to insuring your commercial buildi
ng or property than making sure a replacement cost endorsement is in place. Some of these items include co-insurance, the policy form, special deductibles and changes to city building codes or ordinances. One of the least understood coverages for commercial buildings and properties is Ordinance or Law Coverage. Ordinance or Law is an extremely important additional line of protection, especially when your property is older.
In the United States, many cities have ordinances that buildings must be demolished if more than 50 percent of the structure is damaged. The cities will also require a reconstructed building to meet the current construction codes of the city. Let’s say, the clubhouse in your Mobile Home Park Burns down 50 years after construction and now all newly constructed commercial buildings are required to be fully sprinklered and retrofitted for an earthquake. These are new construction costs that aren't covered by your commercial property policy form.
Also, if a damaged building has no ramps, or automatic or remote doors and accessible toilets, the owner may have to make these additions to the building when reconstructing. All of these changes can cost the property owner thousands of dollars out of pocket during reconstruction. Standard commercial property insurance does not offer much coverage for such costs. The majority of insurers pay either $10,000 or five percent of the building's insurance amount, whichever amount is less is paid. This small amount of compensation can easily be used up by demolishing the building, bringing the building up to code or starting new construction elsewhere.
Building owners need to consider purchasing additional coverage for Ordinance or Law. Ordinance or Law Coverage can be added to your Commercial Property Coverage by endorsement for an additional premium. Unless the costs result from failure to comply, the bills for demolishing and rebuilding are covered. Ordinance or Law Coverage is broken into three section:
• Coverage A provides protections against loss to the undamaged portions of the building.
• Coverage B includes the cost of demolishing undamaged parts of the building.
• Coverage C includes the increased cost of construction or repairs necessary to comply with newly enacted codes and ordinances.
When purchasing Building Ordinance Coverage, Coverage A will be equal to the amount of coverage in place for the entire building. For Coverage B and Coverage C, separate limits need to be determined based on the changes made to the city codes and ordinances, since the original date of construction.
Building Ordinance Coverage protects the owner only for the additional costs associated with replacing or repairing the damaged structure. Loss of income due to a longer period of construction is not covered by Building Ordinance. An endorsement is available to cover this exposure as well.
To learn more about Ordinance or Law Coverage, feel free to contact us. After a loss, the last thing any property owner wants to deal with is a coverage gap that results in out of pocket expenses