Ordinance or Law Coverage, Why You Need It
On the basic Commercial Property Insurance Policy there is coverage for replacement cost value in the event of a loss. Most business owners assume that this will cover them if something occurs to their building/property. It will definitely cover the damaged part of the building, but many town ordinances state that if the building is damaged beyond a certain percentage the entire building has to be taken down. The basic commercial property policy does not cover the undamaged part of the building to be demolished or rebuilt. This is an enormous cost.
It is essential to add the Ordinance or Law Coverage endorsement to your commercial property policy to protect against having to pay out of pocket to take down and rebuild. It is important to remember when rebuilding that all new building codes have to be followed. New building codes may include updated electrical, sprinklers, elevators, etc. which are very costly.
Here is a good example of how a 50% loss from a fire could devastate a business owner if they do NOT purchase the Ordinance or Law Coverage. The building has a Replacement Cost of $1M and the fire causes damage to 50% of it in the amount of $500K. If the demolition and debris removal is $100K, the new up to code sprinkler system is $50K and a new by code elevator is now required which would be an additional $100K. The town building ordinance requires that the entire building be torn down when 50% or more is damaged. This brings the total for the loss to $1,250,000 where the basic property coverage will only pay $510K. That means the business owner has to pay $740K out of pocket!
The basic policy will only pay $510K for the loss when the actual cost to replace the entire building is $1M. The extra $10K payment is from the Increased Cost of Construction portion of the policy that states that there is Limited Coverage and the company will pay the lesser of $10K maximum or 5% of the buildings value. This Limited Coverage of Ordinance or Law is not enough to pay for an entire second half of a building to be demolished and then rebuilt.
The Ordinance or Law Coverage endorsement will let you schedule the specific costs for your building to replace the undamaged portion in Coverage A, the demolition cost in coverage B and the increased cost of construction in Coverage C. This endorsement is so important for both old and new buildings. Please call us with any questions regarding this endorsement or any of your insurance needs. mancuso-nowak.com