In a perfect world, a business would buy commercial property insurance and be covered for all property damaged or destroyed by any cause of loss, as well as any resulting consequential damages. In the event of a claim you would simply swipe a card like you were buying bread and milk, and be indemnified on the spot. Unfortunately, the world is far from perfect, and so it goes that property insurance coverage has the potential to have gaps and limitations that may or may not be able to be addressed. Particularly, the consequential losses that can follow a direct physical loss can create some serious problems for a business. Debris removal costs, increased cost of construction resulting from ordinance or law, and pollution cleanup costs can be far more than expected after a building has been damaged or destroyed.
Debris removal can be a big expense that can often eclipse the coverage limit provided for it in a standard property insurance form. Debris removal is typically an additional coverage in most property forms, as opposed to being included in the scheduled building or business personal property limits. As such, it is limited to 25% of the sum of the direct loss and the deductible. There is also an additional $10,000 in coverage available if the sum of direct physical loss and debris removal expense exceeds the scheduled property limits, or if the debris removal expense exceeds the amount payable under the 25% coverage provision. In the event of a total loss, it’s not hard to imagine the potential shortfall of insurance to cover the total debris removal costs under this provision.
To increase debris removal limits, the ISO CP 04 15 Debris Removal Additional Insurance endorsement would need to be added to the base property form. A specified amount would need to be selected and would be scheduled on the endorsement. Of course, choosing a limit for the increased coverage is a tricky task, and requires careful consideration. Analysis of a building’s size and construction materials, manufacturing processes and materials, and any potential pollution hazards that may require special handling will provide a general guideline. A consultation with a general or debris removal contractor would provide the best estimate.
Another problem that can arise following a property loss is the increased costs associated with compliance of ordinance or law. Businesses with older buildings that sustain total or partial damage will be subject to complying with current building codes when reconstructing or repairing a building. The big surprise here is that increased costs of construction related to ordinance or law are expressly excluded from most commercial property forms. The exclusion also applies to business interruption, so any loss resulting from delays caused by ordinance or law would not be covered. Some insurance carriers do offer property coverage forms with additional sub limits for ordinance or law coverage, but the coverage is limited.
Ordinance or law problems center on such issues as engineering & design, electrical standards, HVAC standards, fire safety, and zoning bylaws that could prohibit a business from re-building on the same site following a loss. To make matters worse, many building ordinances require a building to be completely demolished if it is partially damaged to a certain degree. Then there are environmental and pollution regulations that would mandate the cleanup of toxic debris, as well the use of expensive modern pollution monitoring equipment at the rebuilt or repaired premises.
In order to address this coverage gap, a property policy should be endorsed with the ISO form CP 04 05 Ordinance or Law.
Ordinance or law coverage is a three pronged coverage form consisting of:
Coverage A – Coverage For Loss Of The Undamaged Portion Of The Building
- This provision covers the cost of demolishing and rebuilding the undamaged portion of a building following a covered cause of loss.
Coverage B – Demolition Cost Coverage
- This provision addresses the extra costs associated with demolition following a covered cause of loss. A specific limit of insurance must be selected for this coverage.
Coverage C – Increased Cost of Construction
- This provision affords coverage for additional costs incurred when ordinance or law requires higher standards of construction or compliance with current safety standards. A specific limit of insurance must be selected for this coverage.
Like Debris Removal, Ordinance or Law coverage requires specific limits of insurance to be selected on coverages B and C. Similarly, selecting these limits is not easy and requires careful analysis. The current construction specifics of the insured premises should be compared to current building codes, and current zoning bylaws should be reviewed to determine whether or not the building would be allowed to be rebuilt on the same site. As always, a consultation with a general contractor would provide the best estimate.
Ordinance or Law coverage is not all encompassing, and has a fair share of conditions and limitations. As is typical with other consequential loss property coverage, Ordinance or Law coverage will only respond if the initial property loss is covered by the base property form. Also, it will apply only if the property being rebuilt or repaired is to be used for the same type of occupancy, unless ordinance or law prohibits it. If ordinance or law prohibits it, the coverage will pay the lesser of the Coverage C limit or the actual increased cost of construction at the new location.
Debris Removal and Ordinance or Law coverage both have some limitations, one of which is cleanup of pollutants. Debris Removal coverage does includes pollutant cleanup, but excludes the costs to remove the pollutants from water or land on the insured premises. Ordinance or Law coverage excludes costs associated with cleanup of fungus, dry or wet rot, or bacteria, but it is covered under the The Pollutant Cleanup and Removal provision found in most property forms. Like debris removal, it is a separate additional coverage with its own limit, usually $10,000. This additional coverage limit can be increased by endorsement.
One thing to keep in mind is that the coverage available under the Pollutant Cleanup and Removal provision only covers the insured premises, and will not respond to claims for pollutants that escape to third party premises. A separate Pollution Legal Liability policy would be needed to cover such claims. Businesses with extensive pollutants on premises should carefully evaluate this potential risk exposure and should strongly consider this coverage.
This white paper has merely broken the surface of Debris Removal, Ordinance or Law, and Pollution Coverage. Each of these coverage provisions require up front leg work to determine the overall risk exposure and the appropriate limits to purchase. Particularly, businesses that operate out of older buildings or have hazardous materials on their premises should realize that there are potential consequential losses that could have a severe impact beyond a future direct loss. At the time of that loss, the completed up front leg work would certainly have been worth it.
IMPORTANT NOTICE: The information presented here is for informational purposes only and should not be relied on as legal advice. No one should act or refrain from acting on the basis of the information provided but should instead seek the appropriate legal advice on the particular facts and circumstances at issue from a properly licensed attorney.