(June 2013)
BACKGROUND
Grandfathering is an
important tool in passing laws to improve the quality of new construction. This
is because it exempts existing structures and does not require their owners to
comply with new laws and ordinances. Revolts and chaos would reign if existing
buildings had to be upgraded each time a new code or ordinance was introduced.
Laws that permit
grandfathering also specify when and the circumstances under which an exemption
ends. In many cases, an existing building must comply with new codes and
ordinances after a significant property loss or when it undergoes a major
renovation. A typical provision may require that the entire structure that does
not currently comply with the code be brought up to code if 50% or more of it
must be repaired or rebuilt. The rationale is that upgrades can be made when
major repairs take place.
Insurance policies are
contracts of indemnity. This means they return the insured to the condition
that existed before the loss occurred and nothing more. They are not intended
to improve the insured's situation. Complying with codes and ordinances creates
a betterment for the insured. That is why most
insurance coverage forms and policies do not cover the cost of such
improvements. Even replacement cost valuation provisions state that any changes
required due to an existing ordinance or law are excluded.
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Example: F & J Slaughtering was built outside the original
city limits. Over the years, the city limits expanded and F & J is now
inside the city limits and violates the ordinance that prohibits livestock
within the city limits. F & J was grandfathered when the zoning laws were
enacted. A severe tornado destroys 75% of F & J's property. When it
contacts the city and attempts to obtain building permits, it is informed
that the slaughterhouse cannot be re-built at its current location because it
violates current zoning requirements. F & J's only option is to rebuild
elsewhere. The insurance company pays only the cost of rebuilding 75% of the
slaughterhouse at the current location because of the ordinance or law
exclusion. It does not pay for the expense to demolish the undamaged portion
of the building. It also does not pay any additional costs associated with rebuilding
at a new site.
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In light of this dilemma,
what can be done to protect against the issue of complying with ordinances or
laws?
AVAILABLE ORDINANCE OR LAW COVERAGE
1. CP 00 10–Building and Personal Property Coverage Form
Additional Coverage–Increased
Cost of Construction provides a limited amount of coverage to bring a damaged
building up to code. It applies automatically to any building that uses the
optional replacement cost valuation. The amount of coverage is very low. It is
the lesser of $10,000 or 5% of the limit of insurance. This coverage is similar
to the coverage that CP 04 05–Ordinance or Law
Coverage provides.
Related Article:
CP 00 10–Building and Personal Property Coverage Form Analysis
2. CP 04 05–Ordinance or Law Coverage
This endorsement includes
three separate coverages. Each is treated separately and apart from the others.
- Coverage A insures against loss to the undamaged
portion of the building. This coverage is unusual because it pays for the
value of property that must be intentionally destroyed. However, coverage
applies only for that portion of the building that must be destroyed in
order to comply with a building code or ordinance that was previously
grandfathered that is imposed following a covered loss.
- Coverage B insures against the cost to demolish and
remove the undamaged portions of the building. This coverage is even more
unusual than Coverage A because these are the costs to destroy undamaged
property. As with Coverage A, it applies to only the costs to demolish the
portion of the building that must be removed in order to comply with a
building code or ordinance that was previously grandfathered that is
imposed following a covered loss.
- Coverage C insures against the increased costs to
repair or rebuild the property to comply with current building, zoning, or
land use ordinances or laws. The increased costs must be incurred in order
to comply with building codes or ordinances that were previously
grandfathered that are imposed following a covered loss.
CP 04 05–ORDINANCE OR LAW COVERAGE ANALYSIS
A. Schedule
The first part of the
endorsement is a schedule that allows the insured to select the type of
coverage desired. A limit of insurance must be entered if Coverage B and/or
Coverage C is selected. There is an option to combine
Coverage B and Coverage C into a single blanket limit of insurance.
A limit of insurance is
not entered for Coverage A because it depends on the building limit on the
declarations. The insured cannot establish a value on a possible undamaged
portion of the building that may have to be demolished. Rating for Coverage A
is based on a rate surcharge applied to the total building limit.
B. Application of Coverage(s)
Certain conditions must
be met in order for any of the coverages selected to apply. Coverage does not
apply without these conditions.
1. The ordinance
or law must regulate building construction, repair, demolition, or zoning and
land use requirements and be in effect at the time of loss.
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Example: The Merrilltown city council fought for years to require that
only buildings of masonry non-combustible or better construction be permitted
in the downtown area. The ordinance was passed on 02/01/13. Merrilltown Furniture occupied a large frame building
downtown that a large fire damaged on 01/28/13. It was forced to comply with
the new ordinance when it applied for a building permit. Merrilltown
Furniture requested coverage under
CP 04 05 but its request was denied because the law was enacted after the
loss occurred.
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2. A covered cause of loss must cause the damage
to the building that results in forced compliance with building ordinances or
laws that were previously grandfathered. If only some of the damage to the
building is covered, this coverage pays only its proportion that the covered
loss bears to the total loss.
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Example: Fair Weather Hotel does not have wind coverage on its
commercial property coverage form but it does include CP 04 05–Ordinance Or Law Coverage. A Wind Pool policy provides
wind coverage. A hurricane causes direct wind damage to the building and also
downs a power line that starts a fire in the building. This results in 50% of
the building being destroyed. The claims representative determines that half
of the loss is due to wind and the other half is due to fire. The coverage that
CP 04 05 provides is limited to 50% of the total loss.
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C. Exclusions
It is not unusual for an
insured to seek pollution coverage in every insurance coverage form or policy.
The coverage this endorsement provides does not include any coverage for
pollution, fungus, or mold, even if an ordinance or law requires cleaning up a
contaminated or affected building. In addition, there is no coverage for the
costs associated with any testing or response to pollutants at any site.
D. Coverage
1. Coverage A–Coverage for Loss to the Undamaged Portion of the
Building
Property insurance
usually applies to only damaged property. This
coverage does just the opposite and covers undamaged property. The Building and
Personal Property Coverage Form covers the damaged property. This coverage
applies to the undamaged portions that must be demolished because of a law or
ordinance that controls construction.
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Example: McKinley Department Store is a five-story, joisted
masonry building in the downtown area. A city ordinance requires that all
buildings two stories or higher be of masonry noncombustible or better
construction. Grandfathered buildings must conform to this ordinance if more
than 30% of a building is destroyed. A fire destroys 40% of the building.
McKinley is informed of the ordinance and told that it cannot rebuild the
structure as is. In addition, it must demolish and remove the remaining 60%
because it does not meet current construction requirements. Coverage A
applies to the undamaged 60% of the building. CP 00 10–Building And Personal
Property Coverage Form applies to the damaged 40% portion.
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2. Coverage B–Demolition Cost Coverage
Providing coverage on the
undamaged portion of a building is not enough. In order to rebuild the structure,
the undamaged portion must be removed and the site cleared to allow for new
construction. This coverage allows the insured to anticipate the expense to
demolish an older structure and requires a separate limit of insurance. This
limit should be selected carefully and after much thought and review because of
the high costs of demolition. The actual costs of demolition and site clearance
are covered up to the limit of insurance on the endorsement schedule.
3. Coverage C–Increased Cost of Construction
a. This coverage
is important for any company subject to the Americans with Disabilities Act
(ADA) or any of a number of similar or related local, state, and federal
ordinances that affect construction, reconstruction, repairs, remodeling, and
renovations after a loss. Many of these ordinances and codes are helpful and
the cost to comply is relatively inexpensive and easily accommodated in new
construction. However, similar compliance in existing buildings or structures
following a loss is considerably more expensive and difficult to accomplish. In
addition, most insurance coverage forms and policies do not cover these costs.
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Example: Golden Years Nursing Home has served the needs of the
aged in the community for decades. The building is masonry construction with
plaster walls. The hallways in certain areas are rather narrow but lead to
spacious open areas. A fire that starts in the kitchen damages the kitchen
and dining hall. When building permits are obtained to repair the damage,
Golden Years is told that the hallways must be widened to meet ADA standards.
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b. This coverage
pays the increased costs to repair the damaged portions of the building up to
the minimum requirements of the ordinances and laws. It also pays the costs to
remodel or even rebuild the undamaged portions of the building in order for
them to comply with the ordinance or law’s minimum requirements. The buildings
do not have to be demolished before this is implemented.
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Example: Golden Years meets these requirements because covered property
is damaged by fire. Golden Years incurs increased costs to repair, rebuild,
or replace the damaged part of the covered property in order to comply with
enforcing an ordinance or law.
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This coverage applies
only if the building is actually repaired, remodeled, or rebuilt for the same
or a similar occupancy. The occupancy cannot be changed unless the law or
ordinance requires a change in occupancy due to current land use or zoning
restrictions.
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Example: Golden Years looks at its options after the loss. One is
to change from a home for the aged to a restaurant. After a review of its
policy and this coverage form, Golden Years realizes that this coverage does
not apply if it decides to rebuild as a restaurant because that is not the
same or a similar occupancy.
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One unusual feature of
this coverage is that certain types of property usually excluded may be
covered. If any of the property listed below must be altered because of a
building ordinance or law’s requirements, the increased costs for the alteration
are covered:
- Costs of excavations, grading, backfilling, or
filling
- Building foundations
- Pilings
- Underground pipes, flues, and drains
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Example: The building inspector from the local health department
visited Golden Years after the loss and informed it that the kitchen needed
an additional drain to comply with health department requirements. The cost
of the additional drain is covered because this requirement was in effect
before the loss and is a minimum requirement to obtain health department
approval.
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E. Loss Payment
1. Proportional Loss
Settlements
When a combination of covered loss and uncovered loss triggers coverage
under this endorsement, any settlement is paid based on the percentage the
covered loss bears to the total loss.
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Example: Jamey’s Garage is destroyed. 50% of the
damage was from a covered loss and 50% was not covered. Jamey requests his
Coverage A, B, and C settlement but he receives only 50% of any settlement
calculated in this section.
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2. Coverage A
Loss payments vary
depending on the valuation selected. They are based on whether the valuation
basis is actual cash value or replacement cost.
When replacement cost
valuation applies and the building is repaired or replaced, the loss payment is
based on the least expensive of the following options:
- The actual amount to repair, rebuild, or reconstruct
the building on the same premises, with the same height, floor area,
style, and comparable quality
- The limit of insurance on the declarations for the
covered property
Note: This coverage does not apply to the increased cost to upgrade
the type of construction to meet current codes. For example, if the building
construction must be changed from frame to masonry non-combustible, Coverage
C–Increased Cost of Construction provides the additional cost to do so.
When replacement cost
valuation applies and the building is not repaired or replaced, or when actual
cash value valuation applies, the loss payment is based on the least expensive
of the following options:
- The building’s actual cash value at the time of loss
- The limit of insurance on the declarations for the
covered property
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Example: The Finway Pianos plant
sustains explosion damage to the extent of 60%. Finway
purchased Coverage A and its limit on a replacement cost basis is $2,500,000.
The Finway family considers rebuilding but they no
longer have the heart or will to continue the business. Finway
decides to demolish the building and sell the land to the city. The amount
paid in this case is the building’s $1,000,000 actual cash value.
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3. Coverage B Specific Limit (not blanket)
If there is a limit for
Coverage B on the endorsement schedule, the loss payment is based on the least
expensive of the following options:
- The insured's actual cost to demolish and clear the
site at the covered premises
- The limit of insurance on the endorsement schedule
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Example: Continuing the
example above, Finway Pianos has a $150,000
Coverage B limit. The actual cost to demolish the remaining portion of the
building is $100,000. The cost to clear the site is apportioned with the
debris removal limit in CP 00 10–Building and Personal Property Coverage
Form. As a result, the total cost of demolition and debris removal is
completely covered.
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4. Coverage C Specific Limit (not blanket)
If there is a limit for
Coverage C on the endorsement schedule, the insurance company pays for the
increased cost of construction. However, it does not pay:
- Until the property is actually repaired or replaced
at the same premises or at another location
- Unless the repair or replacement is made as soon as
reasonably possible after the loss or damage. This is subject to a
two-year maximum time period following the loss. The insurance company may
extend this period in writing during the two-year period.
If the building is
repaired or replaced at the same location, or if the insured decides to rebuild
at another location, the most paid under Coverage C is the least expensive of
the following options:
- The increased cost of construction that would have
been incurred at the same location
- The increased cost of construction limit of insurance
on the endorsement schedule
If the ordinance or law
requires that the insured relocate its operations to a different location, the
most Coverage C pays is the lesser of either the increased cost of construction
at the new location or the increased cost of construction limit of insurance on
the schedule.
Note: There is no payment under this coverage if construction does
not take place.
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Example: Finway Pianos had an increased
cost of construction limit of $500,000 because it planned to rebuild with a
different kind of construction if a loss occurred. In this case, Finway does not rebuild. It asks for the $500,000 in the
settlement but the insurance company denies the request because it does not
rebuild.
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5. Coverage B and Coverage C Blanket Limit
If the insured requests a blanket limit to apply to both Coverage B and
Coverage C, that limit is the most paid in any one occurrence. However, certain
limitations apply. For example, with respect to demolition, the
insurance company does not pay more than the insured's actual costs to demolish
and clear the debris from the site after a loss.
If increased costs are
incurred during construction, the insurance company does not pay:
- Until the property is actually repaired or replaced
at the same location or at a different one
- Unless the repair or replacement is made as soon as
reasonably possible after the loss or damage. This is subject to a
two-year maximum time period following the loss. The insurance company may
extend this period in writing during the two-year period.
If the building is
repaired or replaced at the same location, or if the insured decides to rebuild
at a different location, the most the insurance company pays under Coverage C
is the least expensive of the following:
- The increased cost of construction that would have
been incurred at the same location
- The increased cost of construction limit of insurance
on the endorsement schedule
If the ordinance or law
requires that the insured relocate, the most the insurance company pays is the
least expensive of the following options:
- The increased cost of construction at the new
location
- The increased cost of construction limit of insurance
on the endorsement schedule
F. Endorsement Terms
Each building listed on
the endorsement schedule is treated individually. All terms apply separately to
each listed building.
G. Existing Ordinances or Laws
If the insured was
previously notified and required to comply with ordinances or laws and has not
done so, this insurance does not pay for any compliance required after the
loss.
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Example: Farley’s Restaurant was told it had to install two
additional drains in the kitchen to comply with current health department
requirements but it ignored the order. When rioting occurred and the
restaurant was damaged, Farley’s added the cost of the drains to the
increased cost of construction. However, the claims representative refused to
pay for the drains when he discovered the outstanding orders to install them.
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H. Examples of Proportionate Loss Payment
This endorsement provides
an example of how coverage applies when a loss is only partially covered.
I. Definition
Fungus is defined. It is
the same definition as the one used when the term fungus is used in other
forms.
Related Court Case:
Building Code Compliance Held Compensable By "Reasonable
Expectations" of Insured
