Once the previously existing structure has been removed, the site cleared and all pre-construction work complete, the new building can be constructed. Coverages "A" and "B," as detailed in the previous post, have fulfilled their purpose; the new/replacement structure can be built. But the cost to bring the new building into compliance with current building code is greater than the cost necessary to replace the structure as it stood prior to the loss. Plus, the time required to rebuild the structure may be greater had there been no forced compliance with building codes.

Coverage "C" of the Ordinance or Law coverage and Ordinance or Law-Increase Period of Restoration combine to cover these increases in cost and restoration time. Each is detailed in this post.

Coverage C - Increased Cost of Construction

This third leg of Ordinance or Law Coverage represents and provides the funds necessary to pay the difference between the insurance policy meaning of replacement cost and the insured's belief about and understanding of its meaning. In short, Coverage "C" pays the costs in excess of the amount paid by the underlying commercial property policy necessary to bring the damaged structure into compliance with the building code in effect at the time of loss. Without Coverage C, the insured would have to pay these additional building costs out-of-pocket.

Coverage "C" has the added benefit of extending protection for some classes of real property specifically excluded in the commercial property policy. Losses triggering the enforcement of the local building code trigger Coverage "C" to add the cost of excavations, grading, backfilling and filling, building foundations, pilings and underground pipes, flues and drains to the list of insured property.

It is possible to have an Ordinance or Law claim and payment under Coverage "C" only. The last of the three covered losses allows payment under Coverage "C" without the need for payout under "A" or "B." The three types of losses to which Coverage "C" responds are:

• The cost to repair or reconstruct the damaged portion of the building;
• The cost to reconstruct the undamaged portion of the building if demolition is required; or
• The cost to remodel the undamaged portion of the building if demolition is not required.

Three caveats must be satisfied before Coverage "C" applies:

1. The rebuilt or remodeled property must be intended for similar occupancy (unless such occupancy is no longer permitted);
2. To receive payment under Coverage "C," the building must first be rebuilt or remodeled. There is no option to take the actual cash value (ACV) of the upgrades such as exists in the commercial property policy and Coverage "A." If the insured decides to not rebuild, the insured will receive the ACV of the damaged part of the building from the commercial property policy; plus the ACV of the undamaged portion of the building will be paid under Coverage A; and
3. Repairs or replacement must be made as soon as reasonably possible, but they must be completed within two years after the loss. If it appears that more than two year will be required, the insured can request an extension. The insurer will evaluate the request based on the conditions surrounding the request and may or may not grant the extension.

The insured can choose to rebuild anywhere; but the most Coverage "C" will pay (subject to the limit of insurance purchased) is the increased amount necessary to replace the building at the insured premises. If, however, the local ordinance or law requires the building be relocated, then this coverage part will pay the lesser of the increased cost at the new premises or the limit of coverage.

Since the goal of Coverage "C" is to replace the damaged building with an improved one, the underlying property coverage must be written on a Replacement Cost basis, preferably insured at or near 100 percent of insurance to value (ITV). Doing so will remove most limit gaps and coinsurance problems. Notice, however, that the coinsurance condition does not apply to Coverage "C."

Coverage "C" coverage options mirror those available to Coverage "B":

• Scheduled locations and limits;
• Blanket Coverage C limit applying to all insured locations;
• Blanket combined Coverage B and Coverage C applying to all locations; or
• Combined Coverage B and Coverage C limit applying to specific locations (requires the Statement of Values form CP 16 15).

Likewise, premium development for Coverage "C" is the same as for Coverage "B." The chosen Coverage "C" limit is divided by 100 and multiplied by the net building rate at whatever coinsurance limit is being used. The net rate used should not include Agreed Value or Inflation Guard factors.

Ordinance or Law - Increased Period of Restoration (CP 15 31)

This short, one-page endorsement accomplishes one goal, the re-defining of the term "Period of Restoration" as used in the Business Income form. But this one change provides a potentially huge benefit to the insured.

"Period of restoration" in the unendorsed business income coverage is defined as the time period beginning 72 hours (or whatever amount of time is negotiated) after the loss and ending the earlier of (1) the date business is resumed at a different location; or (2) the date the property at the described premises should be repaired, rebuilt, or replaced with reasonable speed and similar quality. Any delay arising out of the application of any ordinance or law that increases this period, resulting in additional loss of income, is specifically excluded in the policy.

Ordinance or Law - Increased Period of Restoration (CP 15 31) redefines the "period of restoration" to include any increase in time necessary to repair or reconstruct the property as a result of the application of any building code. As in the Ordinance or Law Coverage (CP 04 05), the building code(s) causing this increase in time must be in effect at the time of the loss. This one could be the more important of the two ordinance or law endorsements.

Most businesses cannot operate, at least not for very long, unless there is a stream of income. Rarely does a business close (or fail to reopen) after a major loss due to inadequate property coverage. Even if the property coverage is inadequate, alternative financing sources can be found to assist in rebuilding the structure. Businesses that fail to reopen after a major property loss or close shortly after reopening do so because of the crippling loss of and lack of income.

Accurately anticipating the additional "period of restoration" resulting from the application of local building codes is, at best, a guess. Some of the time factors unique to ordinance or law which must be considered are listed below:

• Time necessary for the authority having jurisdiction to decide if the building has breached the major damage trigger. This period can vary greatly among jurisdictions depending on the rule and guidelines applied;
• Time necessary for the jurisdiction to decide if the building must be torn down or can be remodeled;
• Time to find and schedule a demolition contractor;
• Time required to clear and re-grade the site after demolition;
• Time to draw new plans;
• Time to get the plans approved; and
• Time to rebuild the building to code.

Individually or combined, the time factors listed above (and others not on the list) could easily morph into several weeks or months. Without the CP 15 31, the insured would have NO coverage for the income lost during the additional "period of restoration" attributable to the application of any ordinance or law.

Adding the CP 15 31 to the Business Income coverage increases the time element premium approximately 20% (more if earthquake coverage is included). Compared to the catastrophic consequences of not purchasing the coverage, this is a very reasonable premium.

Neither the Ordinance or Law (CP 04 05) nor the Ordinance or Law - Increased Period of Restoration (CP 15 31) endorsements pay for loss caused by or due to 1) contamination by "pollutants" or the presence, growth, proliferation, spread or any activity of "fungus," wet or dry rot, or bacteria; or 2) the additional cost or time to test for, monitor, clean up, remove, treat detoxify, or neutralize the effects of "pollutants," etc.

Still to Come

Calculating each coverage part remains to be detailed. Developing the proper ordinance or law limits for all three coverage parts are detailed in the last post of this series.