From a property insurance standpoint, historic buildings contain inherent and often unique values that require a higher degree of attention than modern buildings. At the 2010 American Association of Insurance Services (AAIS) Main Event, Dave Mistick, president of Circumspex LLC, a Pittsburgh-based firm that helps organizations plan for and recover from disasters, addressed how the design and construction of historic buildings makes them more vulnerable to damage—especially by fire—and more expensive to repair after damage has occurred. And he provided a wide range of suggestions for managing the risks associated with historic structures.

Beyond the intrinsic characteristics of historic buildings, which increase the complexity, risks and costs of insuring them, they also have to be analyzed based on what goes on inside them. And since they are existing buildings, materials and labor codes must be taken into account.

What exactly is a historic building? The term has more than one meaning. The building itself may be historic. Or it may be a historic landmark, being a particular building in a locality. Or it may be a certified historic rehabilita­tion, which is itself a Pandora’s box of complexity from the insurance, tax and claim standpoints. It may also be a building with historic roots insofar as being an individual building or site, or be part of a local, state or national district. Keep in mind that a building may simply be old and not historic at all. The issues that follow address historic buildings being preserved, rehabilitated, restored or remodeled.

Preservation and rehabilitation projects are relatively simple, Mistick said, because the buildings are in reasonably good condition and the work is less intensive, although rehabilitation usually involves more tax codes. Restoration and remodeling projects are dynamic and may require a hodge-podge of considerations because they involve maintaining the current structure intact while usually completely gutting and replacing most, if not all, of the interior.

Other issues that arise are municipality controlled historic easements that involve maintaining the building in a certain way using certain materials. Various historic tax credits apply, depending on the building’s age and use, and the state historical organization as well as the federal U.S. Department of the Interior must document these.

In determining the proper value, traditional methods such as market or acquisition value, or replace­ment cost based on square footage, assembly costs, or unit costs usually don’t work. Mistick said that instead, the best and most reliable approach might be the toughest to sell to an insurance company—using esti­mates from a specialty contractor who works in this niche. It is important to remember that this cost estimate is driven by historic building components added to regulatory requirements to arrive at a true replacement cost.

These projects have a number of other cost determinants (or cost drivers), not the least of which is the availability of historic or similar materials, and trade or craftsmen in the area to do the work. Costs can rise dramatically when the skilled workers must be brought in from distant locations and when their housing, meals and transportation costs must be provided in addition to their wages. Other cost drivers are hazardous materials that must be handled (such as asbestos abatement or lead paint removal), building codes, other regulatory requirements, and tax credit certification.

Historic components are some of the most challenging issues and require an expert to ferret out the potential pitfalls that await the owner or contractor. Mistik provided the following examples:

• Plaster castings, carvings and table runs

• Decorative finishes and architec­tural embellishments

• Material issues, such as lead, latex, or milk paint

• Historic millwork such as hand carved vs. machine milled, including architectural millwork/custom profiles and installation labor

• Historic flooring, such as exotic or first-growth forest products

• Decorative metals, “historic” mechanicals and equipment, and fine art murals

Building codes are an ever-present wild card issue because the extent of damage defines code implications. Accessibility, seismic activity, and energy/HVAC issues are building code considerations.

Full reinstatement insurance is a level of coverage that should enable the owner to completely rebuild to the same design quality and style but, in case of a total loss, in accordance with current legislation. Similarly, with partial losses, it covers the cost to repair and rebuild the damaged and/or destroyed parts. Compared to their modern counterparts, historic buildings are inherently expensive to repair and rebuild.

As a result, the premium charge for full reinstatement insurance is usually quite high. Owners may select lesser coverage with correspondingly lower premiums, if the insurance company agrees, but the risk assumed because of their reduced coverage must be considered carefully.

Mistick provided several recom­mendations concerning reinstatement of values:

• If the building has a historic value that would be destroyed or seriously compromised by rebuilding in whole or in part, full reinstatement insurance may not be necessary.

• If the building is part of a group of historic buildings in a conservation area that would be greatly devalued if a single element were not rebuilt, full reinstatement insurance may be necessary.

• If the building has a commercial value or interest that must be pro­tected, such as obligations under a lease or mortgage, or where it is part of an investment portfolio, full reinstatement insurance may be a contractual requirement to protect such interests.

• If the premium charge for total reinstatement outweighs both the building’s historic or commercial value, a lesser form of insurance may be acceptable.

• Total losses are quite rare. The vast majority of losses are partial. It is difficult to identify the point where a building is so damaged that full reinstatement is not justified. However, a figure between 50% and 60% has been suggested.

Other coverages to consider, according to Mistick, are:

• Contents coverage for items not permanently attached to the building, including furnishings, works of art, collections, and certain external building features

• Engineering coverage for damage or loss of mechanical objects, such as elevators, boilers, ventilation systems, and lifting equipment

• Liability coverage for claims for damage to persons or property made by visitors and neighbors

• Consequential loss coverage for loss of business income or loss of profit that applies to loss of revenue from visitors or rent and other consequential financial loss, such as temporary relocation, removal and storage costs

• Terrorism coverage—this is usually excluded but separate coverage may be available and should be considered, since many national historic landmarks in other countries have been damaged by acts of terrorism.

• Green building issues introduced into historic buildings may significantly increase the risk of damage or destruction, as such losses in historic buildings in other parts of the world have demonstrated. Additional precautionary steps should be taken and the insurance company should be notified to arrange proper coverage.

Mistick pointed out three general areas in which historical buildings can mitigate their level of risk:

• Design. With guidance by specialists, consider adding barriers that limit the spread of fire and smoke in conjunction with implementing fire detection and fighting systems above and beyond statutory minimum requirements. Review combustibility and damageability of components and finishes and consider implementing issues that reduce the chance of fire. Review heat sources inside the building and find ways to reduce the risk of their becoming sources of fire.

• Historic buildings are most prone to loss during construction. Access must be restricted and escape routes, fire detection systems, and fire-fighting systems should be maintained. Equipment that uses exposed flames or sparks should not be used inside the building and hot work permits should be required. Compounds containing flammable solvents should be avoided, trash removed daily, good housekeeping maintained at all times, and all work areas inspected and cleared at the end of each work day.

• Management should issue standing orders concerning regular testing of heat producing equipment, fire detection, and fire fighting systems. Smoking must be controlled and all areas inspected regularly. Fire evacuation and salvage drills should be developed and practiced regularly.

Risk management and insurance on historic buildings is complex and requires considerable thought and planning, in many cases even above and beyond the points indicated above.