By LeRoy Utschig, CPCU, CLU, ARM
Last month's column discussed the problems which commercial property owners can face when they receive a settlement for their property losses which does not take into account the added costs of complying with building laws or ordinances. And we talked about the coverage available to alleviate those problems.
This month we'll deal with the effects which those same building laws or ordinances have on the commercial property owner's business income exposure. Then, we'll talk about how to deal with this exposure. The examples provided are based on actual claims.
A tavern in central Illinois sustained partial damage. The fire marshal's investigation, site cleanup, and the securing of contractors' estimates and building permits took about six weeks. They were ready to start rebuilding when an agency created by the Americans With Disabilities Act (ADA) came on the scene. The damaged building did not comply with their rules.
Due to ADA's rules, much of the undamaged part of the structure needed to be demolished. Money was spent to tear down or demolish the structure. There was cost to haul away the debris from the undamaged part of the structure. And, there was additional construction cost to install those items needed to comply with ADA's requirements. (You'll recall last month's article dealt with how the property insurance on the structure dealt with those costs). Normally, it would have taken eight months for the repairs to the tavern to be completed. However, it took time for ADA to make its recommendations, and there was extra construction time to install everything required by the agency of the Americans With Disabilities Act. It was 12 months before the tavern reopened. The ADA compliance had extended the time the firm was out of business by four months.
In another claim situation, an old, two-story brick building sustained about $182,000 of fire damage. Central Illinois was again the site of this loss. ADA required the owner to spend an additional $200,000 in modifications to comply with their regulations. It took an additional six months for ADA to decide what had to be done and to install the ADA-specified modifications. Installation of an elevator in the two-story building, the addition of wheelchair ramps and modified restrooms were just a part of the ADA recommendations.
As the building was built right up to the sidewalk, a wheelchair ramp could not be installed at the front. Therefore, the ramp had to be built at the rear. And the ramp could not be built in one straight line due to the height of the first floor above the parking lot at the rear of the building. Actually, three ramps with two landings were required to have the ramp reach the desired height.
None of the restrooms in the structure complied with ADA rules. As could be expected, the doors were too small. Then there was not enough room to open the doors wide enough to admit a wheelchair. The stall(s) were too small. Putting in larger stalls was not as easy as it might sound. Moving a partition was easy, but the difficult part was the commodes. They were too close to the walls of the restrooms. Pipes had to be changed to move the commodes. Moving the water intake pipe was relatively easy; however, moving the exhaust pipes was the difficult part. These pipes were built into the building walls and floors. Parts of walls and floors had to be destroyed to relocate the exhaust pipes. Whether the pipes needed to be moved six inches or two feet, it took time to tear out walls, floors and pipes and then to put in new pipes and walls. Complying with ADA requirements doubled the time required before the firm could reopen and be back in business.
In the northern part of Milwaukee, Wisconsin, a firm sustained $1,000 in damage to their circuit breaker box. Operation of building laws required them to rewire the entire building at an additional expense of $20,000. Two days would have been required to repair the $1,000 in fire damage. However, it was necessary to shut down for three weeks in order to rewire the entire building.
Ordinance or law business income exclusion
The pattern is quite clear. ADA requirements or local building laws can and do impact the length of time needed to repair properties after a loss. Each of the three property owners was told by the respective adjusters that there was no business income coverage for the additional repair time caused by the operation of building laws. They quoted from Insurance Services Office (ISO) Form CP 00 30 06 95, Business Income (And Extra Expense) Coverage Form:
We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your "operations" during the "period of restoration..."
"Period of restoration" does not include any increased period required due to the enforcement of any ordinance or law that:
(1) Regulates the construction, use or repair, or requires the tearing down of any property.
There is coverage for the length of time needed to repair damaged property without the impact of the enforcement of building laws. That aspect of the coverage is not affected. Just the extra time element loss caused by the operation of local, city, county or state laws and/or the ADA is excluded.
Ordinance or law business income coverage
An endorsement providing coverage for the extended repair time due to the operation of building laws can be provided for your clients. Adding Form CP 15 31 06 95, Ordinance or Law--Increased Period of Restoration will provide the necessary protection. This is what Form CP 15 31 states:
The Period of Restoration definition is replaced by the following:
"Period of Restoration" includes any increased period required to repair or reconstruct the property to comply with the minimum standards of any ordinance or law in force at the time of loss, that regulates the construction or repair, or requires the tearing down of any property.
The expiration date of this policy will not cut short the "period of restoration."
An electrical contractor in north central Wisconsin had modified its building to comply with Americans With Disabilities Act requirements. Because the building was located on very level ground, installing the required wheelchair ramp was easy. Restrooms had been altered to accommodate wheelchairs. So, the contractor thought she was in good shape in the event of a loss.
A windstorm blew off part of the roof. The actual repair of the roof damage itself would not take long. But, the contractor was quite surprised when she could not get the permits needed to begin repairs. The city told her that she would need to move the electrical circuit breaker box. Current building codes required the circuit breaker box to be located outside of the building. This one was inside the structure. An additional two weeks were required to move the circuit breaker box.
In northwestern Wisconsin, a tavern/store on a lakefront property burned to the ground. Wisconsin's Department of Natural Resources (DNR) would not allow the structure to rebuild. Under current rules, the property was too close to the water. The resort owner tried to get permits to build a structure farther away from the water line. However, the public road going by the property prevented him from doing that.
As another example, a small plumbing supply firm located in southeastern Wisconsin had a loss. They were very secure in the knowledge that they had the very best insurance program available. After all, they had a businessowners policy (BOP). Their agent had told them that BOPs cover everything.
A fire totally gutted their building. Debris removal, getting repair estimates and all of the activities related to rebuilding a building were proceeding at a normal pace. The account went to the city government office to get their rebuilding permit(s). They didn't get them. Government officials had not yet decided if the firm could rebuild at the site. "We don't know yet if you can rebuild. When we have decided, we will let you know if you can rebuild," they were told.
BOP excludes ordinance or law business income loss
Eleven months later, government officials let them know that they could rebuild on the site of the fire-gutted building. For almost a year, the operation of building laws delayed the reconstruction and impacted the "period of restoration" of the Business Income Section of the Businessowners Contract.
Here is the applicable wording from ISO's Businessowners Form, BP 00 02 12 92:
We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your "operations" during the "period of restoration." The suspension must be caused by direct physical loss of or damage to property at the described premises....
We will only pay for loss of Business Income that occurs within 12 consecutive months after the date of direct physical loss or damage.
Having heard so often that the Businessowners policy covered everything, the new adjuster proceeded to gather information to process the Business Income part of the loss. As it exceeded his authority, the adjuster submitted the file to his supervisor. After looking at the file for a short time, the supervisor asked the adjuster for documentation of how long the city had delayed the repairs. The file contained no information indicating that the delay had been caused by the city. As a learning situation, the supervisor made the young adjuster do what he should have done in the first place. She made him read the policy! Reading the policy is what he should have done very shortly after identifying the scope of the loss.
This is what the adjuster found when he read the policy:
"Period of Restoration" means the period of time that:
a. Begins with the date of direct physical loss or damage caused by or resulting from any covered Cause of Loss at the described premises; and
b. Ends on the date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality.
"Period of Restoration" does not include any increased period required due to the enforcement of any ordinance or law that:
(1) Regulates the construction, use or repair, or requires the tearing down of any property.
Due to the delay, rebuilding at the plumbing supply firm started on the 11th month. Eight months would be needed to rebuild. In other words, the delay and repair time together totaled 17 months. The insuring agreement points out the first limitation of the Businessowners Contract. There is only 12 months of coverage. Five of the "reconstruction months" would not be covered. Coverage would be afforded for just compensable items sustained during the 12 months from the date of the fire. Time used to clean up the site and get repair estimates would be covered. The increased time the firm was out of business, due to the city's delay in making its decision, would not be covered.
The plumbing supply firm owner believed his insurance agent when the agent told him that there was no way to cover that loss. While talking to another agent who was quoting on the account, the business owner mentioned this. The quoting agent did not hesitate for a second and told him that this coverage was available.
Using Form CP 00 30 and CP 1531 as stand-alone coverage in addition to the BOP would have covered the loss. An advantage of this form is that there is no 12-month limitation.
For every example given here, and others too numerous to include in this article, firms need to have the Ordinance or Law--Increased Period of Restoration added to their Business Income coverage.
Summary
* Government entities such as states, counties, cities, and the ADA can impact the length of time required to rebuild a structure.
* The increased rebuilding time is not automatically covered by the Commercial Property or Business-owners forms.
* Form CP 04 05 and 15 31 can be added to the Commercial Property form to cover the building laws exposure.
My recommendation is to add the ordinance or law coverage endorsement(s) to every commercial account where you insure a building(s).
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