You are insured and sustained a fire loss. The township has now told you to demolish the damaged and undamaged portions of your building, and when you re-build make sure the building is fully sprinklered. How will you pay for these additional costs?
“The additional costs to comply with an ordinance due to the loss can be substantial, such as the loss of value of an undamaged portion of the building, demolition costs and the additional costs to reconstruct a building to comply with the ordinance,” says Phil Coyne, vice president at ECBM.
Smart Business spoke with Coyne about how building ordinance or law coverage would fill this gap in your standard property insurance policy.
What is ordinance or law coverage?
Standard property ‘cause of loss’ forms have a coverage exclusion for loss or damages that occur as a direct result of enforcement of any law or ordinance regarding construction, use or repair of the property, which includes demolition. Three coverages are available to address this exclusion under the ordinance or law coverage of your property loss form:
- Coverage A — Loss to the undamaged portion of the building. The limit should be included in the building limit.
- Coverage B — Demolition coverage, the cost to demolish and clear the building. The amount of coverage should be determined.
- Coverage C — Increased cost of construction, which covers the additional costs to comply with the ordinance or law. Limits should be determined.
In some cases, Coverage B and C are combined under one limit.
Why is ordinance coverage necessary?
Each state, county, township and municipality chooses to adopt and amend national codes, such as the National Fire Protection Association’s Fire Code, according to their needs and concerns. It can be an ever-changing landscape, and many times older buildings are grandfathered or exempt from these codes until a loss occurs.
The coverage should be on every insured’s wish list. It’s probably most critical for buildings that are older, or have older portions, and may have grandfathered codes or regulations for square footage and density. Many lenders have a requirement for this coverage in mortgage agreements.
What triggers the coverage?
There has to be a covered cause of loss that results in the application of a building ordinance. For instance, in 1990 a city ordinance said every new building in excess of three stories had to be sprinklered. Your building is four stories and built in 1985, so the ordinance doesn’t apply. However, the ordinance also might say if 50 percent of an older building is damaged, the entire building has to be demolished and rebuilt. If, after a large fire, you must demolish the building and put in a sprinkler system, this triggers your ordinance or law coverage.
Where might this coverage not apply?
The ordinance or law coverage will not apply if an insured was required to comply with an ordinance and chose not to. Let’s say, a township requires buildings with four or more apartment units to have hardwired smoke detectors and you decided not to install them. If you chose not to install them and then the building sustains a covered loss, the coverage won’t apply.
The three ordinance coverages all have to do with direct loss to the building or property. There’s no provision for the loss of business income. Standard business income policies exclude coverage for the increased period of restoration due to the enforcement of laws or ordinances. Therefore, you would need to endorse your policy to pick up coverage for this increased time.
Also, anything excluded from the policy would not be covered, such as flood loss. Every building ordinance and business income policy excludes any costs regarding pollution or mold and fungi.
What should you consider when buying this coverage?
Look at the current value on your building(s) and what coverage you get under your policy form because each insurance company adapts it differently. Have a thorough discussion with your broker regarding what coverage you think you need and what you can actually get. The insurance company may limit the amount of coverage, based on your premium and portfolio size.
Phil Coyne is a vice president at ECBM. Reach him at (610) 668-7100 or firstname.lastname@example.org.
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After more than six years of decreasing insurance premiums and broadly available coverage, commercial insurance rates have reached bottom and are beginning to increase, while coverage terms and conditions are diminishing.
“Now is the time for business owners to focus greater attention on their property and liability insurance programs and take steps to minimize the impact of these coming changes,” says Philip Glick, senior vice president at ECBM Insurance Brokers & Consultants.
Smart Business spoke with Glick about what a tighter insurance market means and how businesses can handle these changes.
What happens when insurance premiums rise?
Historically when premiums begin to rise, coverage terms and conditions also are generally scaled back. Many of the broad coverage terms and conditions that have been readily available during the past few years are becoming more difficult to maintain.
What are other indications of a tighter market?
Many insurance companies have begun to slow down the adjusting of property insurance losses, particularly with respect to the business income portion of claims. Property claims that historically could be adjusted in three to six months are often taking more than a year to close out. Property insurance companies also are routinely bringing in forensic accounting firms to pick apart every line of income and extra expense claims, often delaying the adjusting process by as much as a year.
Insurance companies are routinely denying coverage for additional insureds under the general liability policies of those they cover. For example, there are extensive delays for landlords getting acceptance of coverage for claims filed by people injured at their tenants’ premises. This is also occurring when general contractors ask for coverage for claims by their subcontractors and property owners are seeing delays in obtaining coverage for claims filed against them from construction site injuries for work done by general contractors.
During the past several years, insurance companies have been imposing coverage restrictions. As an example, insurance companies will not provide contractual liability coverage nor extend additional insured status to another party for the sole negligence of that other party under the commercial general liability policies they write for contractors to extend coverage to building owners.
There’s a push for higher windstorm deductibles on property insurance coverage written for clients with properties not just on the Florida coast, but in areas 30 to 40 miles from the coast, including large parts of New Jersey, southern Connecticut and Massachusetts. They are imposing deductibles as high as 2 to 3 percent of insured building values for windstorm losses.
What can employers do to mitigate these changes to property and liability insurance?
As business owners, you can take a number of proactive steps now.
- Take control of adjusting new property loss, including setting strict timelines and strategies soon after the loss occurs. Then closely monitor progress from the initial claim report until the final closeout and payment.
- Demand that your vendors, contractors and suppliers provide the required additional insured coverage needed and get confirming renewal certificates of insurance. Copies of the appropriate additional insured endorsements should back up these certificates on the supplier’s renewal insurance policies to verify that the additional insured protection is extended to you.
- Push back aggressively on your contractors, suppliers and vendors to be sure their insurance companies promptly accept the tender of any claims from your company under their general liability insurance policies.
- Carefully evaluate the detailed terms and conditions of the renewal proposals for every insurance policy you purchase. In addition, scrutinize the renewal coverage provided to you by your vendors, contractors and tenants to be sure the renewal is as broad as the prior coverage you relied upon.
- Meet early with your insurance broker or agent to get an early warning of any likely changes in coverage terms and conditions and premium increases. Also, request your renewal insurance proposals as early as possible including getting several optional quotes for each major insurance policy to have choices available to help mitigate any rate increases of attempted coverage restrictions.
- Get renewal proposals including higher deductibles on property coverage, and also including optional deductible quotes on your general liability insurance renewals, as ways to reduce renewal premium increases. Likewise, get quotes with higher automobile physical damage deductibles.
- For larger businesses, consider renewal workers’ compensation proposals that include deductibles or retrospective (cost plus) rating options if your current policy is written on a guaranteed cost basis.
- Increase your umbrella liability, directors’ and officers’ liability and other liability policy limits now if your current coverage limits are too low. Similarly, increase your insured property and business income values to adequate amounts while you can still negotiate reasonable property insurance renewal premiums before rates move up further.
- Attempt to lock in renewal premiums and coverage terms and conditions now for a longer term. Many insurance companies are still willing to provide 15-month or 18-month terms and, in some cases, even 24-month policy terms and conditions for clients with good loss experience and a strong financial position. During the past few years, many insurance buyers didn’t pursue longer-term policies believing that they could obtain lower rates on renewals as the market continued to soften.
- Evaluate the responsiveness, scope of services, financial strength and staying power of the insurance companies and the insurance agents or brokers you do business with. Be sure the professionals you deal with will help you implement strategies to properly protect your business through the next few years.
Philip Glick is a senior vice president with ECBM Insurance Brokers & Consultants. Reach him at (610) 668-7100, ext. 1310, or email@example.com.
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Due to the historic amount of catastrophe losses that have occurred over the past few years, the property insurance market has changed significantly. This is particularly true for businesses that have exposure to catastrophe perils such as wind, flood and earthquake.
“If you have property that has these exposures, you are going to see significant changes on your property renewal,” says Gloria D. Forbes, an executive vice president with ECBM Insurance Brokers and Consultants.
Smart Business spoke with Forbes about how to manage your property insurance through the storm.
How has the market changed?
Both insurance companies and reinsurance companies are using new catastrophe predictive models to determine their rates, as well as deductibles and capacity. Capacity is how much of their capital they can allocate for these ‘CAT’ exposures, or, more simply put, the amount of coverage that they will be able to offer in insurance limits. The latest version of the model was adopted by most insurance companies last spring and summer, so the market is still in the process of changing, with rates and deductibles increasing.
How do catastrophic losses affect the market?
Insurance companies purchase reinsurance to protect them from very large losses. We have seen some of the largest catastrophe losses in history each year since 2009. Because property reinsurance is a global market, what happens in Chile, Australia, Thailand and Europe has an impact on the American market.
So any client with property that is considered to be exposed to windstorm, flood or earthquake is going to see changes in both the rate being charged to insure those exposures and is also likely to see change in terms and conditions.
What other changes can businesses expect?
When we refer to windstorm, we are usually referencing named storms such as tropical storms and hurricanes. Traditionally, named windstorm issues were limited to coastal property, but with the new model, the area considered at risk has expanded.
Although they may not be used to seeing them, businesses may begin to see percentage deductibles for exposure to windstorms or named windstorms. Those percentage deductibles are not a percentage of the loss; they are percentages of the total value of the property. If you have a $10 million building with a 1 or 2 percent deductible, you would have a $100,000 or $200,000 deductible, respectively. In the past, you would see this in Florida and properties surrounding the Gulf of Mexico. These percentages are being used more frequently to put the insurance company further away from the loss.
We are starting to see separate named windstorm deductibles being applied for locations within a 25-mile radius of the coast, from Virginia through New England.
Also, with the rise in tornado activity, we are seeing insurance companies increase windstorm deductibles, so you might not see a percentage deductible for windstorm, but you might experience the insurance company putting a higher flat dollar deductible, say $50,000 for windstorm.
Insurance companies are also decreasing limits for wind, flood and earthquake, which is an adjustment. In the past insurance companies would ‘throw in’ a certain amount of coverage for flood or earthquakes. Last year’s east coast earthquake impacted that. There were numerous losses as a result of that quake.
Now insurance companies are more cautious about giving away earthquake coverage.
How has the way insurance companies determine rates, premiums and deductibles changed?
There have been great advances in modeling over the last few years. The insurance companies use analytics to predict storm frequency, severity and the probable maximum loss they are exposed to, given recent events. As these models become more sophisticated, they are tracking their exposures differently than they used to.
Here’s an example: A hurricane hit the gulf and did minor damage, but it continued to bring a huge rainstorm through the central part of the U.S. Most of the damage done was inland flooding from the rainstorm activity that took place for 48 hours after the hurricane hit the coast. Now when an insurance company underwrites that hurricane exposure, it is not just looking at how it hits the coast but also at the resulting rainstorm damage that takes place afterward. In the past, that tracking capability did not exist.
Also, many insurance companies are changing their coverage to include flooding related to a named storm or hurricane as part of the damage done by the storm. Consequently, the flooding is thus subject to the higher storm/wind deductibles that apply, as opposed to being considered a separate event.
What can businesses do to reduce the possibility of suffering catastrophic losses?
Obviously, you purchase insurance on property you own to protect your financial interest, but one of the best things you can do to reduce the possibility of loss is to properly plan for disasters ahead of time. It is important to have someone who can guide you through the changing policy terms and assist you in identifying your exposure to loss.
Additionally, it is typical to have resources become overloaded in a catastrophe. So one of the keys to disaster planning is to have in place the arrangements that you need. As a result, in the event of a large disaster, you will receive quick response from restoration companies and contractors to assure that cleanup happens as quickly as possible and your property is preserved. Moisture can create a mold exposure, which is often not covered by insurance companies. Working with an experienced broker that has these relationships and can assist you at the time of loss is critical.
Gloria D. Forbes is an executive vice president with ECBM Insurance Brokers and Consultants. Reach her at (610) 668-7100 or firstname.lastname@example.org.