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Insurance Coverage for Building Code Upgrades (Part 1 of 2)

What is “Code Upgrades”? What is “Full Replacement Cost”?
“Code upgrades” in insurance terms is referred to as ordinance and law, which includes “increased cost of construction.”
Multi family dwellings, condominium associations and most planned developments that have attached units, as well as commercial properties need to have fire and casualty coverage for the “full insurable replacement cost” of their properties. Most of their policies have verbiage such as “full replacement cost” that give a false sense of adequacy for insurance coverage. The issue here is that building codes are frequently being upgraded, to meet higher levels of protection from earthquake, fire and other perils. Code changes add to the reconstruction cost.  Unfortunately, these full replacement cost policies often provide just for reconstruction of the building as originally constructed but do not cover the extra costs needed to meet all the subsequent code changes.
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 cost of reconstruction, ten to thirty times 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 buildings needs to be rebuilt to current building codes.
  • etc.

Code Upgrade Coverage is Not Automatically Included in a Fire and Casualty Policy
More often than not, code upgrade coverage is not included automatically in a fire and casualty policy, and some insurance companies do not even offer it.  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.
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.
“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 than get stressed out about fixing it after it happens.
In our next blog, we will continue in Part 2 with specifics about code upgrade insurance.

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