Building ordinances and laws (building codes) are upgraded regularly to improve a structure’s resistance to windstorm, earthquake, fire, and collapse. Since some of these changes apply to new construction on a go-forward basis, it is not uncommon for older buildings to increasingly depart from current code requirements over time. Since it can be expensive to update an older building to comport with current building codes, building owners must have a plan to cover the cost. Even though ordinance and law insurance may contribute to the cost, the number of owners electing to forego such coverage is surprisingly high.
Ordinance and Law insurance is designed to pay for the extra expense of rebuilding to comply with ordinances or laws, such as building codes, which did not exist at the time the building was originally built. If an owner is required to rebuild pursuant to new codes, the cost is virtually certain to exceed the cost of merely restoring the building back to its pre-loss state.
Unfortunately, it is not uncommon for inexperienced building owners to first learn of this possible expense until after experiencing a property loss, since the loss is often the trigger for the property owner’s obligation to bring the property up to current code. For example, if an older building suffers severe structural damage from a fire, the property owner may be required to implement current building codes in the repair or reconstruction of the property. Since this can be a very expensive proposition, the value of obtaining ordinance and law coverage is obvious.
Although ordinance and law coverage is an important part of a building owner’s insurance program, it does not necessarily protect against all risks associated with bringing a building up to code. What about losses caused by delays in rebuilding the property caused by the need to comply with the current building code?
For example, consider a building damaged by fire. Restoring the building to its pre-fire condition without fixing any code violations would take one month, whereas correcting all of the code violations would extend the restoration by three months. The building owner would be out of business for an additional three months by virtue of complying with new building codes. Even in the best of circumstances, such a suspension of operations can cause severe financial hardship. However, there is a type of insurance coverage designed to protect building owners against such a loss—business interruption coverage, which can be obtained in conjunction with ordinance and law insurance.
Business interruption insurance generally covers reductions in net income and provides a business with the funds needed to pay normal operating expenses during periods of time when a business unable to continue its operations. Such coverage is often critical in the event of a lengthy property closure because expenses do not stop. Indeed, payroll, mortgage/rent payments, money owed to suppliers, taxes, and other continuing expenses must be met, and business interruption insurance may keep badly needed capital flowing when it is needed the most. However, if business interruption coverage is rejected, a property owner will be required to either fund the continued business operations or survive without the income those operations generate.
Although ordinance and law insurance provides valuable protection against potentially debilitating expenses, combining it with business interruption coverage fills a potentially significant gap in a building owner’s insurance portfolio. The combination of the two increases the likelihood of surviving not only the initial property loss, but the protracted suspension of operations resulting from the obligation to rebuild in accordance with current building codes.
While the decision to obtain ordinance and law insurance and business interruption coverage should be easy, understanding specific policy provisions and terms may be more difficult. Since there may be variations among different policy forms, it is important that you consult with an experienced insurance agent to discuss your options.
If you would like more information about ordinance and law insurance and business interruption coverage, please contact us.