The Big I Virginia Winter 2022-23

More documents

Recommendations

Info

IRV METHODOLOGIES, REPLACEMENT COST iStockphoto.com/Olivia Rich AND RECONSTRUCTION COST By Chris Boggs Determining a structure’s insurance replacement value (IRV) is not complicated. Very few viable methodologies are available to develop an IRV. Any complications in calculating the IRV arise only because there are multiple sources for each option. Once the methodology and source are chosen, estimating the IRV is relatively simple. Although not complicated, developing and applying the correct IRV within the property insurance policy does not guarantee payment of the structure’s entire reconstruction cost following a major loss. Key provisions within the “standard,” unaltered commercial property policy (CPP) preclude payment of certain costs and expenses. The realities of “replacement cost” within the insurance policy can leave a large payment gap between the amount paid by the insurance policy and the cost to reconstruct the structure. The unexpected results of COVID have also created a problem. Not only must the realities of replacement cost and reconstruction cost be understood, but supply chain issues have increased the cost of construction and reconstruction. The cost to reconstruct may be abnormally high for the foreseeable future. ADJUSTMENT OF A MAJOR PROPERTY LOSS “Replacement cost” is a fundamentally misunderstood concept. Unfortunately, the insurance industry may be primarily to blame for these misconceptions. Over time, the insurance industry and its representatives have explained replacement cost to mean new stuff in place of old stuff. While there is a grain of truth in this description, this oversimplification of replacement cost has led to an expectation that is not supported by the policy language. Replacement cost coverage provided by the “standard,” unendorsed CPP pays ONLY for the part of the structure damaged by a covered cause of loss. Beyond providing coverage for ONLY the damaged part of the structure, the unendorsed CPP pays ONLY the amount necessary to rebuild the damaged structure back to its original condition using materials of like kind and quality (LKQ). These two ONLYs represent the key differences between the reality of replacement cost and the expectation of reconstruction cost following a major loss to the insured structure. The CPP pays: • ONLY to repair or rebuild the damaged part of the structure; and • ONLY to return the damaged part to its original condition and state regardless of building codes. A large property loss, if not total, exposes the shortcomings of replacement cost coverage. Following a major property loss, the building codes applicable to the damaged structure may disallow repair and may require the destruction of the undamaged portion of the building. None of the expense associated with the loss in value of, the demolition of and the removal of the undamaged portion is paid under a replacement cost policy. Additionally, no building can be rebuilt out of compliance with the applicable building code. Replacement cost coverage specifically excludes any additional costs necessary to bring the building into compliance with the 26 THE BIG I VIRGINIA WINTER 2022-23
uilding code. A replacement cost policy pays only to put back what was damaged and no more. A March 2021 New Hampshire Supreme Court ruling serves as a prime example of the issues with replacement cost in contrast to reconstruction cost. In 101 Ocean Blvd. LLC v. Foy Insurance Group Inc., Ocean Boulevard Hotel in Hampton, N.H. obtained a $2 million replacement cost policy that provided $10,000 in ordinance or law insurance coverage. In October 2015, a fire severely damaged the hotel. The insured was told the cost to replace the existing structure would be about $1.1 million and rebuilding it in compliance with the current building code would cost an additional $905,070. This is just slightly more than the $2 million replacement cost coverage purchased. The insured decided to demolish the structure rather than rebuild it. After accounting for depreciation, the insurer paid Ocean $910,141 for the structure’s replacement cost, which did not include the additional cost necessary to rebuild the structure in compliance with the building code. Although the insured had sufficient “replacement cost” coverage ($2 million), the reality of replacement cost in the unendorsed policy cost the insured (and ultimately the agent) $905,070. This is not an isolated incident; in conversations with insurance agent’s errors and omissions (E&O) insurance carriers, insufficient or improper explanation of replacement cost is a common error. “Replacement cost” does not pay what many have been led or conditioned to believe. Couple the reality of replacement cost with the fact that the requirements found in building codes have the potential to turn a partial loss into a total loss, and it becomes abundantly clear that replacement cost is insufficient following a major property loss. Reconstruction cost is the goal. • The undamaged part of the structure can be repaired; or • The undamaged part of the structure cannot be repaired and must be demolished and removed. Regardless which directive is given, the entire structure must be brought into compliance with current building code. Replacement cost, as has been demonstrated, does not pay these necessitated additional costs. Achieving reconstruction cost requires endorsements be attached to the commercial property policy. Specifically, Ordinance or Law coverage should be attached to every commercial property policy. Ordinance or law coverage is the primary step (not the only step) towards turning a “replacement cost” policy into “reconstruction cost” coverage. The CPP and the Ordinance or Law coverage dovetail following a “major loss” to get closer to accomplishing reconstruction cost. Following is an example demonstrating how these coverages work towards reconstruction cost. Undamaged Part – 12,000 Sq. Ft. CPP Pays: • Cost to Remove the Debris of Damaged Part • Cost to Rebuild Damaged Part “as-is” FIRE DAMAGE – 13,000 Square Feet 1 Story – 25,000 square feet – Manufacturer – 15 Years Old – 12 Month POR Ordinance or Law (CP 04 05) Pays: • Value of Undamaged Portion (Cov. A) • Cost to to Remove Debris of Undamaged Portion (Cov. B) • Increased Cost to Rebuild ENTIRE Structure to Current Building Code (Cov. C) RECONSTRUCTION COST Rarely does a structure suffer a total loss, partial losses are statistically more likely. If the amount of damage in a partial loss situation crosses a specific threshold the building is judged to have suffered “major damage.” The meaning of “major damage” varies by state and may even vary by jurisdiction within a given state. Because there is no one countrywide definition or application of “major damage,” this concept cannot be detailed in this paper; only the results of what occurs when crossing the “major damage” threshold can be described in this report. When damage crosses the “major damage” threshold, the relevant building code official gives one of two directives regarding the undamaged portion of the building: Note that this is a partial loss that may become a total loss based on the application of the current building code. The jurisdictional building code official’s directive will likely turn this into a total loss by requiring the entire building be brought into compliance with the current building code. Which policy/endorsement pays which part of the loss? Lacking ordinance or law coverage, the only payment owed by a replacement cost policy is the amount in blue. The ordinance or law policy pays the amounts in red and green. Reconstruction cost can be achieved only when Ordinance or Law: Increased Cost of Construction Ordinance or Law: Cost to Remove the Debris of the Undamaged Portion of the Building Ordinance or Law: Value of the Undamaged Portion of the Building CPP: Cost to Remove the Debris of the Damaged Portion of the Building CPP: Cost to Rebuild the Damaged Portion of the Building WINTER 2022-23 THE BIG I VIRGINIA 27
Page 1 and 2: WINTER 2022-2023 VIRGINIA THE MAGAZ
Page 3 and 4: BuildersMutual.com THE BEST-PROTECT
Page 5 and 6: Built To Fit How is it that The Iro
Page 7 and 8: Harford Mutual Insurance Group is a
Page 11 and 12: WINTER 2022-23 THE BIG I VIRGINIA 1
Page 13 and 14: WINTER 2022-23 THE BIG I VIRGINIA 1
Page 15 and 16: Introduction The Great Reshuffle is
Page 17 and 18: Despite these limitations, these es
Page 19 and 20: fell sharply in 2020; a return to t
Page 21 and 22: in Transportation and Warehousing e
Page 23 and 24: percentage of jobs that are conduci
Page 25: dreamstime.com/dedekk THINGS WE THI
Page 29 and 30: 1. Choose a percentage of building
Page 31 and 32: Employees are essential to a Employ

The Big I Virginia Winter 2022-23

Create successful ePaper yourself

Delete template?

Save as template?