(June
2013)
B. EXCLUSIONS
CP 10 30 has three categories of exclusions. Each has
multiple subparts.
Editorial
note: ISO does not give titles to the major categories
of exclusions. To assist in the analysis, we have included the title given to
help identify the exclusion’s main intent.
a. Ordinance or Law (10 12 change)
Local governments develop ordinances and laws that
relate to construction, remodeling, and repair of buildings. Most are not
retroactive. As a result, existing buildings are grandfathered out of the
ordinance until they must undergo renovations or repairs. When a substantial
loss occurs and rebuilding, remodeling, or repair is necessary, the
grandfathered laws activate and come into play. This exclusion states that the
coverage form does not apply to any costs associated with enforcing or complying with such laws and
ordinances.
This exclusion also states that coverage does not
apply to the expense to remove undamaged portions of the building or to rebuild
them. There is also no coverage for the additional cost to rebuild at a
different location because ordinances or laws do not permit the building to be
rebuilt at the existing location. Finally, it does not pay remodeling costs
needed to bring the building up to current standards.
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Example: Harvey’s Hogs started
business operations in 1930. It was located on the family farm 15 miles from
Little Town. Over the years, both Little Town and Harvey’s Hogs grew. As new
subdivisions sprouted, the town limits expanded and new city ordinances were
enacted. One prohibited livestock and other farm animals inside the city
limits.
Over Harvey’s objection, the land area where
Harvey’s hatchery was located was incorporated into the city. Harvey’s
continued to operate as it did in the past and tried to be a good neighbor
but hogs were an unpleasant intrusion on city life.
The farm sustained a significant covered loss
that destroyed 60% of the building. Harvey was ready to start rebuilding but
the city inspector informed him that he could not do so at the present
location.
Because of this exclusion Harvey recovers only
60% of the loss. He must cover the cost to demolish the 40% undamaged portion
of the building and also pay 40% of the cost to rebuild at the new location.
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CP 00 10–BUILDING AND PERSONAL PROPERTY
COVERAGE FORM ANALYSIS
(June
2013)
e. Increased Cost of Construction (10 12 change)
This is welcome protection for any company subject
to the Americans with Disabilities Act (ADA) or many local, state, and federal
ordinances that are not enforced until a building requires significant
renovations or repairs. These ordinances and codes are helpful to many people
and their cost is relatively easily absorbed in new construction. However,
updating an existing structure after a partial loss can add substantially to
the costs to rebuild it and the basic coverage form does not cover them.
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Example: Havor Academy is a private
school that has served elementary school children for over 100 years. The
building is joisted masonry with plaster interior walls. The hallways in
certain areas are rather narrow but lead to spacious areas. A fire starts in
the academy’s kitchen and causes significant damage to the kitchen and dining
hall. Havor obtains the required building permits to effect repairs but is
informed that the hallways must be widened to meet ADA standards. Since the
walls that must be moved are not damaged, the only coverage available to pay
to widen them is the limited amount this Additional Coverage provides.
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This coverage is explained in nine paragraphs.
(1) This paragraph states that coverage is conditional and not automatic. It applies only
when the basic policy includes Replacement Cost Optional Coverage. While it is
unusual to require including an optional coverage as a condition of an
additional coverage, it is necessary in this case.
(2) This paragraph explains the coverage. It responds
to additional costs that must be incurred in order to bring the building up to
the existing minimum standards of
the ordinances or codes. Coverage is subject to modifications in paragraphs e.
(3) through (9). This coverage applies when all of the following events occur:
·
A covered cause of
loss damages covered property.
·
The insured incurs
increased costs to repair, rebuild, or replace the damaged portions of covered
property.
·
The increased costs
result from enforcing requirements to comply with an ordinance or law.
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Example: Havor Academy meets the
requirements because covered property is damaged by fire, a covered cause of
loss. Increased costs are incurred to rebuild, repair, or replace the damaged
covered property. The increased costs result from enforcing requirements to
comply with an ordinance or law. If Havor has Replacement Cost Optional
Coverage, it is possible that coverage is available, subject to paragraphs
(3) through (9).
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(3) This paragraph states that the law or code in (2)
above must meet two requirements before increased costs are covered:
·
It must regulate
construction or repair of buildings (or establish a zoning or land use
requirement) at the described premises.
·
It must be in force at
the time of loss.
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Example: The town council was considering an ordinance that required installing
sprinkler systems in all schools that exceed two stories in height when the
Havor Academy loss occurred. The council voted and passed the ordinance two
weeks after Havor's loss and the building inspector informed Havor of the
change. This Additional Coverage does not apply to the cost to add the
sprinkler system because the ordinance passed after Havor's loss.
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(4) This paragraph relieves the insurance company of any costs due to ordinances or laws the
insured should have complied with before the loss.
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Example: Havor Academy and the town
argued for years about the fire escape ordinance but Havor never had the
funds to comply with it. It believed its evacuation procedure was more than
adequate and that the town was unfair in requiring that it remodel its
building. However, the town held the advantage after the fire loss and
insisted that Havor either comply with the ordinance or the building would
not be allowed to reopen.
Havor turned to this additional coverage but,
since installing the fire escape was required prior to the loss (and Havor
chose not to act), the insurance company was not obligated to pay the added
cost.
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(5) This coverage form is
not designed to cover pollutants. This item clearly excludes pollution. This additional coverage does not pay when local ordinances or laws
force the insured to take actions because of pollutant contamination or the
presence of fungus in a building. It also does not pay any costs associated
with enforcing or complying with ordinances
or laws that require the insured or others to test for, monitor, clean up,
remove, contain, treat, detoxify, neutralize, respond to, or assess the effects
of pollutants, fungus, wet rot, dry rot, or bacteria.
(6) This paragraph states
that the limit of insurance for this additional coverage is
the lesser of $10,000, or 5% of the limit of insurance for the damaged
building. If the damaged building is part of a blanket limit, the coverage is
limited to the lesser of $10,000 or 5% of the value of the damaged building at
the time of loss multiplied by the coinsurance percentage that applies.
Note: The blanket provision
is important because it keeps the 5% from being applied to the blanket limit.
Doing so would allow each building within the blanket to receive the maximum
limit for this additional coverage even if the specific building was worth less
than $10,000.
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Example: Havor Academy has 20
buildings on its campus insured for a blanket limit of $25,000,000 at 100%
coinsurance. The fire damaged three of them. The maximum increased cost of
construction limit available to each building is:
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Building Number
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Value
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Lesser of:
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Maximum Paid
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#1
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$10,000,000
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$500,000 or $10,000
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$10,000
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#2
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$500,000
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$25,000 or $10,000
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$10,000
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#3
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$10,000
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$500 or $10,000
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$500
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(7) This paragraph outlines the insured's options
under this additional coverage after a loss. One is to not rebuild or repair.
However, this additional coverage does not pay if the insured selects that
option. The insured can delay taking action for up to two years. This can be
longer if the insurance company extends the period in writing. The insured can
decide to repair at the existing location or build at a new location. However,
the insurance company does not pay more at the new location than it would have
at the existing location.
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Example: Havor Academy is unhappy with
the loss settlement and the amount it must spend to repair the building and
bring it up to code. After reviewing its options, it decides that building a
new building is less costly than repairing the old one. In addition, doing so
will enhance the overall appearance of the entire campus. The good news is
that the company still pays the $10,000 limit to help it meet the standards.
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Note: Some ordinances or
laws require that the insured actually relocate its operations. In that case,
the limit applies to the new construction.
(8) A conflict could arise between this coverage and the Ordinance or Law Exclusion in any of the
Causes of Loss forms. However, there is no conflict since this paragraph states
that this Additional Coverage is not subject to that exclusion.
(9) The Valuation Condition
and Replacement Cost Optional Coverage exclude the increased costs of construction due to ordinances or laws. Only 4.
Additional Coverages provides this coverage. However, any limitation that
relates to increased costs of construction that appears in those sections does
not apply to this Additional Coverage. The intent of this paragraph is to
eliminate any confusion over the coverages and limitations that exist under
these three separate policy provisions.
Note: CP 04 05–Ordinance or
Law Coverage should be used if higher limits or broader coverage is needed.
