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When Replacement Cost is Not Enough

When property owners have to turn to their insurance because of a loss such as a fire, they expect the damages and reconstruction to be covered under their insurance program. Many business owners are familiar with the term “replacement cost” and assume that it covers whatever expenses might arise during reconstruction. However, when rebuilding due to unforeseen perils, many property owners discover that there are elements to the policy that aren’t completely accounted for.

Two of the most common costs that property owners will encounter that go beyond the replacement cost limit are debris removal and ordinance and law coverage. If your insurance program isn’t designed properly, you could end up paying these costs.

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Debris Removal Coverage

Most business owners understand the cost to rebuild, but what about the cost to demolish the existing structure and clear the site? In the insurance world that cost is known as debris removal. In the event of a total loss where the limit of insurance is likely to be exhausted, the ISO property policy typically provides policy holders with an additional $25,000 of debris removal coverage. A general rule of thumb is that the debris removal expense will be equivalent to 10% of the building limit. So, if you have a $5,000,000 building you can expect to pay $500,000 for debris removal. The debris removal additional limit of insurance endorsement increases the additional debris removal coverage granted in the coverage forms.

Ordinance & Law Coverage

Sprinkler systems, elevators, and compliance with the Americans with Disabilities Act are a few of the hurdles building owners will have to contend with in order to rebuild. If your commercial building currently does not have these systems, do not assume that they are included in your replacement cost limit.

Causes of loss forms contain an exclusion for loss resulting from the requirement to comply with ordinances or laws that regulate construction, demolition, repair, or use of property. This eliminates coverage for any additional cost associated with repairing the damage from a covered loss (over and above what would have been incurred to simply replace the structure as-is) that is incurred in order to comply with these ordinances.

Increased Period of Restoration

Another item to consider - compliance with ordinances and laws could lengthen the time it would otherwise have taken to repair or rebuild your company’s facility. Additionally, there is no coverage for the income loss suffered during the extra time needed to comply with these laws, unless an increased period of restoration endorsement has been attached to the policy.

Remember, these are just a few of the most prevalent concerns business owners will need to address in the event of a total loss to property. Be sure to work with an insurance consultant who understands your business, has walked through your property so they can understand the challenges you may face when rebuilding, and has the experience to know that these coverages can make a difference in crunch time.

About the Author

Scott Hausmann, CIC

Posted in: Property & Casualty

Posted by Scott Hausmann, CIC

Scott joined Hausmann-Johnson Insurance as an agent in 2010. To him, strategizing with business owners to develop a plan to minimize their organization’s risks is what makes each day exciting and interesting. He values working with a wide variety of companies, each with their own unique advantages, opportunities and challenges. Scott always aims to operate in a mode of continuous improvement through better educating himself and clients on the most effective ways to manage the total cost of risk. Scott holds a Bachelors of Business Science from the University of Colorado at Boulder. He is a Rosenberry Society member of the United Way of Dane County and is on the Madison Children’s Museum’s Spring Scramble Committee. In his free time he enjoys water skiing or downhill skiing, depending on the season.

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