Increased Cost of Construction Coverage

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...proper and adequate coverage for the increased duration of repairs exposure.

Establishing Appropriate Limits

Although many insurance buyers and their insurance representatives or consultants try carefully to determine the proper amount of increased cost of construction coverage, some, such as the named insureds in the foregoing case, knowingly turn down the purchase of this extra coverage.

In the case of the Mississippi plaza, the insureds’ agent testified in his affidavit that any time he obtained ordinance or law coverage on a property for these insureds, it was when a mortgagee wanted it included. He also testified that the named insureds were asked after the storm whether they wanted to add the coverage to their policy and it was declined on the plaza, as well as on another location. With yet another facility that was refinanced, the insureds again declined to purchase the coverage.

It is safe to say that those who are candidates for code upgrade coverage want to obtain sufficient limits, particularly once they understand why the coverage is necessary and what can happen without it. The challenges that must be addressed are (1) the cost and (2) calculating how much increased cost of construction coverage is needed. Unfortunately, this insurance is not inexpensive and there is no easy method or magic formula for determining the amount of coverage to obtain.

Many people oversimplify the process by using percentages of property replacement values to project appropriate coverage limits. For example, it has been suggested that for increased cost of construction, the amount of insurance should range from 15 percent to 25 percent of the replacement cost of a building. The lower amount of 15 percent would be used for a building between...

“Upgrade coverage, like replacement cost, is an indemnity form of coverage, requiring the insured to rebuild the property — code compliant — and then seek reimbursement for the difference between the cash received for the loss and the actual cost to rebuild.…”


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