Increased Cost of Construction Coverage

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...not to exceed the coverage limit? While the answer will depend on the particular coverage form, most likely it will be the amount that would have been payable otherwise had the building been repaired or replaced at the site of the loss. If, on the other hand, an ordinance or law requires a relocation, the insurer will be obligated to pay the increased cost of construction, subject to the coverage limit.

In one case, relocation was not required by ordinance or law, but the insured decided to purchase an existing building to replace the one damaged instead of repairing it. In doing so, the insured still sought payment for the increased cost of construction that was otherwise payable. The particular coverage had a limit of $250,000 in any one occurrence. In the case of Snoqualmie Summit Inn, Inc. aka First Western Investments v. Travelers Property and Casualty Company of America, et al., No. CV06-0517 (U.S. Dist. Ct. W.D. WA 2007), the court disagreed with the insured. In its ruling, the court said, “it would be illogical for [the] plaintiff to receive additional funds to pay for increased cost of construction when nothing is actually built.”

The fact that an insured sustains a loss where there are code violations that need to be corrected does not mean that increased cost of construction coverage automatically applies. The loss needs to be otherwise covered; that is, there must be direct physical loss or damage from a covered cause. This same requirement applies to the other coverages available with optional endorsement CP 04 05. This was essentially the argument in the case of Mark West Hydrocarbon, Inc., et al. v. Liberty Mutual Insurance Company, et al., 558 F.3d 1184 (U.S. Ct. App. 10th Cir. 2009).

An explosion in a natural liquid gas pipeline operated by Mark West (the named insured) caught the attention of the U.S. Office of Pipeline Safety (OPS), which ordered a series of tests on the pipeline followed by repairs necessitated by discoveries made during those tests. When the named insured filed a claim with its insurer, it was denied. At the time of the accident, the named insured had maintained an “all risk” property policy with four insurance companies. The policy indemnified the insured against “all risks of direct physical loss or damage occurring during the period of the policy from any external cause, except as hereinafter excluded.”

“The fact that an insured sustains a loss where there are code violations that need to be corrected does not mean that the increased cost of construction coverage automatically applies.”


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