Insurance policies are written based on the concept of "indemnity" which means "protection or security against damage or loss." Fire insurance policies are not designed to put a policyholder in a better position than he was prior to a loss. Otherwise, having insurance might create an incentive to have a loss.
To prevent a policyholder from unfair compensation whenever a covered loss occurs, most insurance contracts are written so that the insurance carrier's only responsibility is to return the building to the condition it was prior to the loss. This is true even if an older, out-of-code building is damaged. Building code updates are not covered under the standard fire insurance policy.
This is true even if there is a partial loss. Most municipalities require that if 50% or more of the building is damaged, the entire structure must be brought up to current building codes. This could trigger expensive structural upgrades to comply with earthquake, hurricane or energy standards and fire code upgrades ranging from hard wired smoke detectors to fire sprinklers systems. For buildings over fifteen years old, the building code changes are likely to be substantial.
Fortunately, there is an insurance coverage called Building Ordinance or Law which is specifically designed to protect against increased repair costs triggered by building codes or ordinances. The coverage is broken into three components:
- Demolition Coverage: Covers the cost of demolition of the undamaged portions of the building in order for the entire building to be replaced with one conforming to present building codes.
- Loss of Value: Covers the costs to rebuild the undamaged portion of the building.
- Increased Cost of Construction: Covers the increased expenses incurred in replacing the building with one conforming with current building codes.
Some common wall HOAs are located in areas where housing density zone changes have occurred since construction. For example, a piece of property that was zoned for 60 units might only be zoned now for 50 units. While the current building may be grandfathered from such zone changes, it might affect reconstruction in terms of set backs, height restrictions, materials and design requirements.
If your building is fifteen years or older, discuss adding Building Ordinance or Law coverage with your insurance agent.
Author: Richard Thompson
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