Increased Cost of Construction Coverage

ADJUSTING TODAY

Adjusters International Disaster Recovery Consulting

Increased Cost of Construction Coverage — Understanding the Complexities of this Important Protection

By Donald S. Malecki, CPCU

Among the many businesses damaged extensively by Hurricane Katrina in 2005 was a shopping plaza in Mississippi. At the time of the loss, this plaza, built in 1995, was 100 percent occupied. The most severe damage was to an anchor food store, which sustained damage to its electrical, heating, ventilation and air conditioning systems.

Over the course of one year following the hurricane, the insurer paid the managing members of the real estate investment corporation (the named insureds) slightly over $2 million in property insurance. Of this amount, approximately $1.8 million entailed building damage and about $293,000 was for lost rent and income. The insureds,...

EDITOR’S NOTE

Your business, including its landmark headquarters building, has been devastated by fire. Rebuilding will be a daunting task, but as you begin the process, you feel some comfort believing that since your insurance program was recently renewed, it will provide the reimbursement you need to fully restore your operations.

Then comes a surprise almost as shocking as the fire itself. Even though your policy contains a replacement cost provision, it does not cover the higher costs of construction you must incur to ensure that your rebuilt facility complies with the latest building codes. These codes change frequently and can impact features ranging from the electrical wiring, sprinkler and other emergency systems, to handicap accessibility. Driving the cost of compliance even higher can be the architects’ fees and extra time it will take to design and build these features into the structure.

Increased cost of construction coverage can protect you against these higher expenditures, but it is a complex coverage that is too often misunderstood and too seldom applied.

In this issue of Adjusting Today insurance expert Donald Malecki discusses important aspects of this coverage, including how insurers and the courts have viewed increased costs of construction. It’s valuable reading — and can help you avoid having one unpleasant surprise follow another!

— Sheila E. Salvatore, Editor


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