Increased Cost of Construction Coverage

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...10 and 20 years old, and 25 percent would be a safer number for a building more than 20 years old. If the building is less than 10 years old or substantially older than 30 years, there are no real guidelines upon which to make an educated guess.

Short of obtaining the services of an architect or contractor to research the current code requirements and then estimating the incremental increases in construction costs associated with implementing the required upgrades, any other projected limits are a shot in the dark.

The difficulty lies in that no two buildings are the same and therefore are not likely to be subject to the same so-called “faults of management” — characteristics that may require improvements for safety reasons and for certain code upgrades following substantial loss or damage. For instance, not all buildings are subject to the requirements of the Americans With Disabilities Act of 1990 (U.S. Code at 42 U.S.C. Sec. 12101-12213). Or if they are, the requirements may differ based on the building’s characteristics.

The owners of those buildings that are subject to the ADA, however, should recognize that having to retrofit a building to meet the requirements could be very costly. Making exterior and interior doors wider and modifying bathrooms to make them wheelchair compatible can be expensive. Other costly items that might have to be added include sprinklers, copper wiring, copper pipes and alternate means of egress. The list is endless. Very costly items may even be structural in nature, such as changes to make buildings “windproof” or “earthquake-proof.”

An additional hurdle is the policy requirement that the insured must prove its upgrade loss and have sufficient funds to make the upgrades. 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, including the increased cost to become code compliant.

In this vein, what also needs to be kept in mind is that replacement cost should not be confused with market value. Market value of property can fluctuate. Witness the selling prices of commercial and residential properties throughout the United States during a recession. The cost of materials and labor, on the other hand can continue to rise, making the cost of repair or replacement of damaged property higher, while the market value of the property itself slipped lower.

In some isolated cases it might be possible to estimate a percentage upon which the amount of code upgrade insurance can be based, but it is unlikely that any...

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