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Increasing Cost of Construction and Building Code Upgrades – Insurance Issues for Residential Property Landlords

Increase in the cost of construction and building code upgrades must be considered in insurance policies for residential property landlords.

Is your property insured at the current rebuilding cost?

A lot of residential property landlords and owners of multi-family dwellings or single family houses don’t bother to increase their landlord insurance coverage for their properties to match the increased cost for rebuilding in case of disasters. Year after year, they simply renew their policies without having an insurance expert like Rick Callway who heads “the Extra Milers Team” at Pacific Diversified to review the policies or check out the REAL cost of replacement.

The cost of commercial rental property construction has been rising due to factors such as labor shortage, increased costs for building materials such as wood, higher prices for land, and higher demand for new construction. 

According to Mercury News, May 17, 2021,”surging demand and a pandemic-choked supply have driven lumber prices up nearly five-fold in the last year to historic highs, adding as much as $40,000 to the cost of a new home, stifling some apartment projects and making shoppers scratch their heads at soaring costs in home improvement stores. The lumber shortages have pushed up home renovation costs, and also stalled some multifamily construction, Bay Area developers say. And building new decks, kitchens or built-in cabinets may cost more.”

“Prices for a standard 1,000 board feet of lumber jumped from $347 to $1,645 between May 2020 and 2021, according to Wells Fargo analysts.”

What basic insurance policies cover 

  • Building at Replacement Cost
  • Cause of loss Special
  • Loss of income (loss of rents)
  • Business Personal property (items you provide in rental unit)
  • General liability
  • Medical Expense  — a general liability coverage that reimburses others, without regard to the insured’s liability

Short term rentals should be totally separate.  There are different issues.

Does your landlord insurance policy have a special endorsement for building ordinance upgrades?

Construction cost increases due to building codes are frequently being upgraded, to meet higher levels of protection from perils. Code upgrades cost is usually not automatically included in a fire and casualty policy, even with “full replacement cost” which ONLY covers  reconstruction of the building as originally constructed. To cover extra costs associated with building code upgrades, an additional policy endorsement must be added, at an additional premium. 

We wrote about insurance coverage for code upgrades in a two-part series back in 2018, which are still relevant today.

In Part 1, we stated that when a building suffers major damage, the local building department may require the entire building to be knocked down and reconstructed to meet current building codes, thus increasing the cost of reconstruction, 10 to 30 times  over the owners coverage limits, especially for very old buildings.

Here are some example of code change:

Earthquake: If a building is reclassified from a seismic Zone 3 to Zone 4 for purposes of meeting higher structural standards for stronger earthquakes.  

ADA: To make buildings more accessible to handicapped and disabled.  

Elevators:  An elevator may be required when a two or three-story, multi-family building needs to be rebuilt to current building codes. 


Many hurdles to get insurance companies to pay for building ordinance upgrades

Moreover, some insurance companies do not even offer code upgrades insurance.  Property owners need to first ask your insurance agent or broker if your policy includes it. If you get a yes, make sure a citation to the exact section of the code upgrade coverage policy is in your policy document pages. Specific codes for claims must be in the endorsements to trigger code upgrade coverage. If a claim is excluded from coverage code, upgrades are also excluded.

We warned in Part 2 that without code upgrade coverage, it may be tens of thousands of dollars additional cost for the owner to rebuild even one building.  For a very large building or multiple buildings, the problem could be even more significant. To mitigate this risk, owners need to always carefully examine the policy to ensure that the wording about code upgrades is written down.

Assuming an old building was burned down, its rebuilding is required to be in compliance with code for elevators and will cost $500,000 more. Both the owner and the architect should identify what code requirements are needed. To have insurance coverage for this added cost, your code upgrade endorsement BEFORE the fire took place should have already included specific claim code for elevators.

 Insurance reimburses code upgrade costs only upon completing upgrade

An insurance settlement is paid before construction starts, but to get insurance company to pay for code upgrades, you need to pass some hurdles:

An insurance company verifies if a code upgrade claim is triggered by a covered peril. Upon determining that code upgrade is indeed required for the rebuilding, then the code work can be done in order to be paid by the insurance coverage.

The owner must pay out of pocket for all code upgrading construction before the insurance company reimburses the cost. If the code work isn’t completed, the insurance company has no obligation to pay for the code upgrades, even if they agree they are covered.

There are many other nuanced areas related to upgrade coverages, costs and reimbursements. Before the renewing date of your policy, please contact us for a review to ensure your complete understanding of what is covered and what is not.  We help you research about your jurisdictional building code changes as well. As the “#ExtraMilers” we are with you every step of the way to protect your properties and your bottom line.

“An ounce of prevention is worth a pound of cure.” We at the Rick Callaway Team of Pacific Diversified will always go extra miles to get you covered exactly right.  We help you avoid the problem in the first place rather than get stressed out about fixing it after it happens. Fast turnaround. We have board level business acumen for understanding your business operations to customize your coverage.  Please call us for a free consultation:  925-788-5558 or email us at:

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