Building Ordinance or Law on Commercial Building

[Rob]

There are situations where a standard carrier will not write a lessor's risk due to the types of tenants the the building owner is renting to. In these cases, I need to go to a surplus lines carrier. On older buildings, I feel more comfortable having Ordinance or Law coverage. However, virtually none of the surplus lines carriers I've dealt with even offer this coverage. Are there any E&S brokers here who can tell me why? I had one E&S broker tell me it was because certain states, including CA, now have a law that would force the insurance co to pay the full amount anyway. I've tried researching this law but haven't found anything. Does anyone know what she might be talking about?

[LadyBroker]

On E & S, I don't see my carriers offering Ordinance/Law coverage on structures that are older than 50 years or so. If the schedule is large enough, you can usually talk them into it, but on a single building, the carrier can't get enough premium. The thinking is that older buildings, the cost to bring them to current building code from where the building is now would eat up all the limits, and then there's nothing left to rebuild.

I would also tend to agree that the courts in California are far too eager to reach into the pockets of anyone, insurance companies included, and that proclivity has led to some of the ridiculousness we have today, in alot of areas of our lives.

In any case, it is possible to find it on the E & S, it's whether your client will buy it.

[Rob]

On E & S, I don't see my carriers offering Ordinance/Law coverage on structures that are older than 50 years or so. If the schedule is large enough, you can usually talk them into it, but on a single building, the carrier can't get enough premium. The thinking is that older buildings, the cost to bring them to current building code from where the building is now would eat up all the limits, and then there's nothing left to rebuild.

I still don't understand the logic there. When you say it would eat up all the limits with nothing left to rebuild, how about providing a separate limit for Ordinance/Law and charging the premium for it. For example, have a $750,000 limit on the building and then choose a separate limit, say $100,000, for Ordinance or Law. The carrier charges an appropriate premium for the $100,000. I don't understand their logic because it shouldn't be that difficult to do.

[Insismypassion]

The broker is likely referring to valued policy "laws" that exist in some states. They are not all necessarily enumerated in statute, but rather are common law arising from court decisions.

If the building is in one of those states, insure it for the cost to rebuild including updates.

The argument that it woud eat up the limits to rebuild is nonsense. When you do a replacement cost estimator on the building, the value that is developed is the cost to rebuild the building today - and that value accounts for current code.

So the carrier is already getting more premium than they are due since they are only going to pay to put back what was there before without the upgrades to current code.

For example, the rebuild the structure exactly as it stands would cost $150 per square foot; but to rebuild to current code cost $200 per square foot (a number arrived at by use of the replacement cost estimator). More than likely you insured it at $200 per square foot 'cause 1) thats what the estimator gave you; 2) when the carrier inspected it and did their estimator, that's the limit they wanted; leading to 3) you don't want to have a coinsurance problem.

It's a 10,000 square foot building so you insure it for $2,000,000. But the real definition of "replacement cost" will only require the insurance carrier to pay $1,500,000. The insured has paid for $500,000 addition coverage up front and the carrier still won't let you protect your client by purchasing the correct coverage. They have the opportunity to receive premium on $500,000 additional coverage, plus get the additional premuim for the ordinance or law coverage.

Don't want to make this post too long, but Ordinance or Law is an intriguing coverage and far deeper than the three pages of the endorsements appear on their face.

[KGB]

I can't indicate why aned E&S carrier will and will not offer Ordinance or Law Coverage. As an E&S broker I do have carriers that will offer the coverage on structures up to 80 years old, providing that the rest of the usual updates are current. My carrier and I are not yet licensed to sell in California.

If your not finding the coverage you may not be speaking to the correct broker or perhaps the right person at the MGA. When I worked previously for 2 national wholesale operations in the past, if you spoke to one person you got one answer, and if you spoke to someone else, they would give you a different answer. It really comes down to the individual broker's personal experience and how well they know their markets and guidelines.

Keep calling your brokers that you need the coverage. Any good E&S broker will keep their carriers informed of the coverage demand and hopefully they will loosen up their underwriting guidelines and start offering the coverage.

[Rob]

The broker is likely referring to valued policy "laws" that exist in some states. They are not all necessarily enumerated in statute, but rather are common law arising from court decisions.

Thanks, that is what I was trying to find out. How would I know if this applies in CA?

[Insismypassion]

Thanks, that is what I was trying to find out. How would I know if this applies in CA?

Look at the California Insurance Code 2050-2060. Not sure if this will completely answer the question. Worth a shot.

[prince987]

I read that 50% bonus depreciation is not available for things that have useful lives greater than 20 years. I believe that a new roof on a commercial building usually must be depreciated over 39 years. On the road traffic accident claims other hand, a new roof probably has a 20 year or less useful life. I am not sure if the IRS has put forth it's view of the useful varuous items like roofs.Thanks for any help with this.