Summary: Most businesses insure buildings and contents against fire and other perils. Most insure against the loss of income or extra expense that follows a loss. But building laws may require the owner to incur unforeseen and uninsured expenses.

What are these hidden risks? There are four.

Demolition - The cost of demolishing undamaged parts of a building when required by law.

Contingent Liability - The cost of replacing the undamaged portions which the law requires to be torn down.

Increased Cost of Construction - The cost of making mandated improvements to rebuild the structures to comply with current building, zoning, or land use codes.

Increased Period of Restoration - The time to rebuild is prolonged to make changes and improvements required by the building code. Loss of income and extra expenses increase during this period.

Example: A small office building is insured for $1,000,000 and has $200,000 of Loss of Income coverage. The building sustains serious fire damage. The following costs are incurred in the process of rebuilding:

A. Debris removal - $25,000
B. Demolish undamaged structure (required by law) - $25,000
C. Replace damaged structure - $600,000
D. Replace undamaged structure (required to be torn down) - $400,000
E. Improvements required to comply with Americans with Disabilities Act - $15,000
F. Install secondary means of egress required by local building ordinance - $25,000
G. Loss of rental income for 6 months after the fire (e.g. 6 months @$16,667) - $100,000
H. Another month of "down time" to install improvements ( required by E&F above) - $16,667

TOTAL: $1,206,667

Recovered through insurance (A,C,G) - $725,000
Uninsured loss (B, D, E, F, H) - $481,667

Why doesn’t insurance respond for such a large amount? Property insurance responds to replace direct damage and loss of income resulting directly from the fire. It does not respond for additional loss incurred by operation of building laws. The additional exposures can be insured by "Ordinance or Law" coverage.

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