RCV vs. ACV & Building Ordinance

Commercial Property Coverage Outline

Property Insurance is any type of insurance that indemnifies an insured party who suffers a financial loss because property has been damaged or destroyed. Property is considered to be any item that has a value. Property can be classified as real property or personal property. Real property is land and the attachments to the land, such as buildings. Personal Property is all property that is not real property. The Building and Personal Property coverage form is the form used to insure almost all types of commercial property. The insuring agreement in the Building and Personal Property coverage form promises to pay for direct physical loss or damage to covered property at the premises described in the policy when caused by or resulting from a covered cause of loss. The following is a brief outline of coverages and how they are used within the Commercial Building And Personal Property coverage form.

Replacement Cost and Actual Cash Value

Property can be valued in several different ways. Insurance companies commonly use two approaches to determine value, which also determines how a loss will be paid; the replacement cost method and the actual cash value method. Insurers consider replacement cost of a property item to be the cost to replace it with new property of like kind. Actual cash value is replacement cost, minus the accumulated depreciation for age and condition.

Ordinance or Law / Building Ordinance

(1) Coverage for Loss to the Undamaged Portion of the Building

Pays for the loss of value of an undamaged portion of the existing building which must be demolished and/or removed to conform with municipal ordinance, code, etc.

(2) Demolition Cost

Pays for the cost of demolition of the undamaged portions of the building necessitated by the enforcement of building, zoning or land use ordinance or law.

(3) Increased Cost of Construction

Pays for any increased expenses incurred to replace the building with one conforming to building laws or ordinances, or to repair the damaged building so that it meets the specifications of current building laws or ordinances.

Operation of Building Laws

Most communities have building or zoning laws to regulate the standards for type of construction, fire protection, electrical wiring, and plumbing, and to regulate the type of occupancy allowed in the city and certain other areas. Under “grandfather” provisions usually included in these laws, buildings that do not meet the standards generally are permitted to remain only because they were erected before the laws in question were passed.

Most laws, however, provide that if a nonconforming building is damaged or destroyed, it must be brought up to code before it can be reoccupied. Many laws also provide that if a building is damaged beyond a certain proportion of its value — 50% is a common measure — it may not be repaired, but must be demolished and, if replaced, replaced by a structure that meets the building or zoning requirement.

Although there are almost countless situations where the operation of such laws is applicable, some common examples are high-rise buildings that must be equipped with automatic sprinkler systems, buildings with electrical wiring meeting less than minimum code, and frame buildings in congested areas zoned for brick or fireproof construction. The effect of the operation of building laws is to almost always result in more costly repair than repair without such requirements.

In virtually all property insurance policies, a building owner’s exposure to loss resulting from the enforcement of building or zoning laws is effectively excluded by language identical or nearly identical to that found in the Standard Fire Policy. The Standard Fire Policy specifies that recovery shall be “without allowance for any increased cost of repair or reconstruction by reason of any ordinance or law regulating construction or repair.”

The effect of this exclusion is to leave the following basic exposures uninsured:

  • The actual expense of tearing down the undamaged portion of a building if a law or ordinance dictates demolition and disposal of the resulting debris.
  • The loss of the value of the undamaged portion of a building.
  • The difference between the value of the building as it stands — the insurable value of the building — and its value if rebuilt to code. Even when insurance is written on a replacement cost basis (i.e., without deduction for depreciation), this exposure exists because the replacement cost referred to in the insurance is that required to restore the original building, not an improved and more expensive version of the original building.
  • An extended loss of business income, extra expense, or additional living expense.