BUILDING ORDINANCE COVERAGE AND THE IMPACT ON HISTORIC BUILDINGS
After the wildfires swept through Gatlinburg,TN in 2016, many businesses faced a loss of revenue when local authorities forced them to remain closed during the extensive clean-up. Those with ordinance or law coverage and loss of business due to an ordinance or law were covered for the loss of income during that period.
Building ordinance coverage, also known as ordinance or law coverage, is an important consideration when evaluating property insurance. This is particularly true when insuring a historic or older building. When damaged by a covered loss, commercial property policies will pay to rebuild the actual physical structure to the condition at the time of loss. However, an unendorsed property policy will exclude the increased cost of construction that is associated with local, state, or federal building codes. For example, the Americans with Disability Act (ADA) became law in 1990. Buildings constructed prior to 1990 are likely not compliant with this law.
It is also important to know the building ordinances in the area where the building is insured. Many communities require a building damaged 50% or more to be demolished. Some communities will require plumbing, electrical, and HVAC systems be upgraded when the building is reconstructed.
This potential gap in coverage can result in an unexpected, large out-of-pocket expense. A properly endorsed property policy can eliminate or reduce this kind of loss.
Building ordinance coverage has three parts:
· Coverage A - Coverage for Loss to the Undamaged Portion of a Building: This comes into play when the loss has not affected the entire building. The commercial property policy covers “direct physical damage to covered property”. The undamaged part of the building would not fit that description because it did not suffer a physical loss, but the value of the property has been diminished. Local ordinances may not allow this portion of the building to be repaired. Coverage A will provide money to tear down the undamaged portion so the entire building can be reconstructed.
· Coverage B - Coverage for the Cost of Demolition: This provides money for the demolition and removal of debris. In Northeast Tennessee, the average cost to demolish a building is roughly $4-$8 per square foot. There are many considerations that are factored into that estimate such as accessibility to the property, the type and weight of the building materials, the distance to the waste disposal site, and whether hazardous materials, such as asbestos or lead is involved. The cost rises to roughly $9-$11 per square foot for an older building. Keep in mind that is cost is per square foot.
· Coverage C - Coverage for the Increased Costs of Construction: This provides for the increased cost of construction to comply with local, state, and federal ordinances.
Though it can be difficult to balance cost with adequate coverage limits, properly endorsed building ordinance coverage will limit the cost of lost revenue or unplanned out of pocket expenses resulting from demolition and increased reconstruction costs due to local, state and federal ordinances. It is also important to reevaluate coverage annually to make sure policies are up-to-date with changes in the law.