The commercial building you own is completely protected by insurance, right? Your insurance limit matches the building’s replacement cost, right? You sleep peacefully at night knowing that in the event of a catastrophic fire, the limit you and your agent agreed on will be more than enough to cover a total loss, right? But you have a nagging thought…IS it enough? How can you be sure?
No matter the age of your building, you need to be concerned about Building Ordinance Coverage. This important coverage, which is too often regarded as necessary only for older buildings that might not meet newer building codes, should be a key part of your property insurance. And you should be especially concerned about the insurance-to-value ratio (ITV for you insurance geeks), because inadequate limits and uncovered costs of rebuilding can be catastrophic to your wallet!
Let’s discuss the components of Building Ordinance Coverage and how they protect you and your business in three distinct and separate ways:
Coverage A protects the undamaged portion of your building – Your property insurance policy pays only for actual damage, so who pays for the undamaged part of your building when the city or county says it has to come down? You do, unless you have adequate limits for Coverage A. My rule of thumb is that if you can get a limit set at 100% of the value of your building, do it.
Coverage B protects against the cost of demolition – Hey, someone has to pay to demolish a building, right? But oops, it’s not covered on your property insurance policy. Your limit for Coverage B should reflect the size and complexity of your building. As a starting point, ask a local contractor what it would cost to demolish the building.
Coverage C anticipates the increased cost of new construction – When you rebuild, what will you have to add or upgrade to meet code? A new sprinkler system? Wheelchair-accessible bathrooms? How about an elevator? None of these items will be covered by your property insurance if they weren’t part of the building to start with they are paid for from this coverage. Determining an adequate limit for Coverage C is difficult, but again, a contractor might be able to give you some sound advice.
Remember, just because your building is newer does not mean you are exempt from potential building ordinance problems. County and city building codes change all the time, and when they do, you could be stuck. I’ve seen it happen. All building owners need to make sure they are adequately protected.
And be careful, don’t be lulled by the built-in limits for Building Ordinance that some insurance companies include in their property insurance policies. In most cases, the built-in limit will not be adequate. At a typical sub-limit of $25,000 to $50,000, the built-in amount might not even cover the cost of demolishing your building. Raising the limit to meet your actual exposure is well worth the extra money in premiums.
Are you a building owner? Then take the time to dust off your insurance policy today and look at your property coverage. Do you see Building Ordinance Coverage listed on your declarations page along with a premium amount? That means you have bought and paid for this added protection. If not, call your agent to find out whether Building Ordinance Coverage is built in and, if so, for how much. Then you’ll really be able to sleep well at night!
By Noah Mason