Commercial property policyholders are often surprised to find themselves on the hook for the additional costs to bring damaged and undamaged portions of a building up to current building codes.  

One might think that, by paying for replacement cost coverage, you would be covered for all costs (beyond a deductible) of repairing/replacing property after an insured loss. Yet, increased costs to have the property rebuilt to meet current building codes are not covered unless specific coverage is contained in the policy.

In addition, when an insured structure incurs partial damage leaving part of the structure undamaged, it triggers a requirement that all components and systems be brought up to current building codes. This often entails demolishing undamaged parts of the structure and removing the resulting debris, thus further increasing the cost of restoration.

Basic property insurance policies are intended to cover the insured for the cost to replace the property “as is,” with a deduction for depreciation. (Replacement Cost Coverage can provide the means to recover the deprecation once the property is restored.) They are not intended to compensate for one’s additional costs to bring a property up to current building codes. Therefore, coverage for the cost for replacing undamaged property is typically excluded under the building property limit of a commercial property policy.

The remaining exposure for demolishing and upgrading undamaged property as well as the associated loss of business income are addressed in a few ways under commercial property policies:

  • Through an “additional coverage” under its own (lower) limit built into a typical commercial property policy;
  • Through a policy endorsement providing a higher limit for the increased costs; and
  • Through an additional policy endorsement covering the effect of increased building costs on the length of a period of restoration, and the resulting additional income loss.

To avoid unpleasant surprises, property owners are advised to understand their own exposure to increased costs for mandatory building upgrades, and the coverage options available to them.

To learn more, property owners can consult two editions of Adjusting Today, published to assist policyholders:

“Increased Cost of Construction Coverage—Understanding the Complexities of this Important Coverage,” and “Ordinance or Law Coverage: Code for Recovery!”