2 ADJUSTINGTODAY.COM In the wake of a series of natural disasters, property owners confront heightened requirements to mitigate damage from local hazards, including the release of pollutants by fire, flood, or wind. In an entirely different vein, owners of buildings in any way open to the public, even if only for employees or clients, must ensure that those buildings, if renovated or rebuilt, are accessible to individuals with physical disabilities. Complying with building ordinances and laws can add substantially to the cost of reconstructing a damaged building. In such situations, property insurance policyholders often find that “replacement cost” coverage does not cover the complete cost of repairing or replacing a damaged building. This can occur for several reasons, among them the fact that a building cannot be replaced “as was” if it did not conform to current building regulations at the time it was damaged. In that case, it will almost certainly cost more to rebuild a damaged structure to code than it was worth previously. If they want to avoid paying that added expense on their own, property owners need to insure accordingly. Conflicting principles Building code enforcement often creates a conflict between two core principles of insurance: • The understanding, sometimes referred to as a “reasonable expectation,” that an insured will be made whole after a loss; and • The “principle of indemnity,” which holds that insurance is intended only to compensate an insured for its loss, not to make an insured better off than he/she/it was before the loss. In practice, these principles can be fully reconciled only under “actual cash value” (ACV) loss settlement, under which an insurer simply pays its insured a sum equivalent to the depreciated value of the damaged property. (Any loss settlement presumes that the damage results from a covered cause of loss to property covered under the policy, and that recovery is subject to deductibles and coverage limits.) Enforcement of building ordinances and laws becomes a problem under replacement cost loss settlement, the most prevalent type of loss settlement for building property. Under replacement cost settlement, the insurer commits to covering the cost of repairing or replacing damaged property with property of like kind and quality, without regard to depreciation. One could argue that replacement cost coverage inherently violates the principle of indemnity to the extent that new replacement property is an improvement over older property that was damaged. Some policyholders have used that very argument to prevent the enforcement of “ordinance or law” exclusions in property policies. On rare occasion, insureds have been successful in arguing along that line, but for the most part, courts have enforced such exclusions, thus requiring insureds to dig deep into their own pockets to reconstruct property they thought was insured. More codes, more upgrades The most striking images from Hurricane Andrew, the devastating storm that ravaged south Florida in August 1992, were of the dramatic contrasts between adjacent subdivisions, some of them leveled, others with their structures still standing. It wasn’t fickle winds that caused these disparate effects, but the relative strength and soundness of the structures. The images served as vivid indicators of how adherence to building codes can make a huge difference in limiting losses during catastrophes. In the decades since Andrew, there have been sustained efforts by insurance trade associations
RkJQdWJsaXNoZXIy NjIxNjMz