Page 56 - AAGLA-JUNE 2022

Member Update
Insurance News: Important Coverage Update for
Apartment Owners
SBe Sure You Have Ordinance and Law Coverage
By Paul J. Smith, Founder and President, SoCal Commercial Insurance Services, Inc.
o, here’s the scenario...let’s assume the 50% destroyed, where local building code requires that unthinkable has happened – there’s been a the undamaged remainder of the building be demolished. fire and your building has sustained heavy Your policy will not pay for the undamaged portion of the damage! At least no one was injured. It’s going building that must be demolished unless you’ve purchased to be okay – you’d purchased insurance with a Ordinance and Law Coverage Part A. When purchased, “Part reputable company and made sure that you A” is usually written to the full value of the building. All insured the building at its full replacement buildings, new and old, can benefit from Ordinance and Law value. Coverage Part A.
The only problem is that insurance policies covering real Part B - Demolition
property will only pay to replace WHAT YOU HAD. Think about that for a minute. What you HAD was a 3-story building constructed in 1967 with 15 units and 10 tuck- under parking spaces. But current code is going to require 5 additional parking spaces, additional handicap access, and upgraded structural elements that will add at least an additional $250,000 (or more) to the cost of construction.
The solution? That is where Ordinance and Law coverage (a/k/a, “O&L”) comes in to play. If you’ve heard of it – Congratulations, you are ahead of the game! If you haven’t, don’t worry - a lot of savvy property owners have not. And if you happen to know how much of Ordinance and Law coverage you have on your current policy then you can probably stop reading right here. But if you’re not familiar with the term or if you don’t know how much O&L is on your policy the rest of this article is for you. There are three parts to Ordinance and Law coverage and this article will touch briefly upon each. Most carriers refer to the three parts as parts “A,” “B,” and “C” although some will call them parts “1,” “2” and “3.”
Part A – Undamaged Portion of the Building
Let’s use the example of a $3,000,000 building that was
Your policy will pay for the hauling away of the rubbish and rubble created when half of the building was destroyed – but it will not pay to demolish the undamaged portion of the building and clear the site. For that you need to have an adequate limit of Ordinance and Law Coverage Part B. Coverage Part B is often written as a sub-limit of Part A. Some carriers will “toss in” a minimal amount - $25,000 or even $50,000 – of coverage. But one size doesn’t fit all. The cost to demolish a building can range anywhere from $4.00 to $15.00 per square foot or sometimes even more. We usually recommend purchasing at least 10% of your building’s replacement value in Part B coverage.
Part C – Increased Cost of Construction
It’s time to get building! Let’s look at some different possible scenarios.
• Let’s say your $3,000,000 building was 40% destroyed. Local building codes say you’ve got to bring the remaining 60% up to code at a cost of $150,000. Your standard replacement cost policy, even with a reputable insurer and full replacement value, will not pay the $150,000. (It also won’t pay
56 JUNE 2022 • WWW.AAGLA.ORG