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Property Insurance Should Include By-Laws Clause

By David G. Truscott

In the event of a loss, changes to regulations and building codes can stop you from rebuilding or significantly increase the cost to rebuild. Your insurance policy should address this issue.

During the process of arranging for “appropriate” property insurance for our apartment building, we are already aware that we should insure our buildings for their replacement cost. However, there’s a little more to it than that. The replacement cost of our building (and the related amount of building insurance) should be based upon the amount that it would cost to replace our building with a building of like kind and quality to that of the original, with no deduction for depreciation, and to have that replacement carried out immediately, on the same site. That amount of building coverage is to include all costs of debris removal and site cleanup necessitated by the loss, and the subsequent rebuilding. Surely this would suffice, right? Not quite.

Since our hypothetical apartment building was built, (let’s say in 1961) a lot has changed. There may now be laws, by-laws, ordinances, or changes to the building code that regulate the construction, repair, or location of buildings, and those newly imposed rules can pose significant roadblocks to the repair or replacement of your apartment building. In other words, even if you and your insurance company want to rebuild following a loss, sometimes you can’t, simply because a relevant governing body won’t allow you to do so.

What’s in the way? Possibly changes to the fire code, the building code, insufficient setback, insufficient parking, or a host of other concerns that might render our building non-compliant.

It’s possible that only a partial loss to our building (it could include fire, or even a falling object) has rendered it to be a total loss in the opinion of our municipality. This may require the complete demolition of our building despite the fact that only a portion of the building was directly damaged. Get ready for a surprise here – your insurance policy will only pay for the portion of your building that was damaged by the insured loss, and, as a further surprise, they will only pay for the debris removal of that portion. As for the part of your building that was undamaged, your municipality tells you that it has to be removed, and this has to be done at your expense.

What’s the solution? A simple endorsement to your property insurance policy, described as “Contingent Liability from Enforcement of Building By-laws”. Often this coverage is available at no additional cost, but if it’s not already included in your insurance policy, don’t expect your insurer to settle a claim on that basis. Make sure it’s there, and, also, that it’s written on a “blanket” basis.

There are three instances where this coverage can help you, and they are:

• The loss of value for the undamaged portion of your building;

• Costs of demolition of the undamaged portion of the building, and associated debris removal costs;

• Increase in the cost of construction.

While the first two points have already been explained, the third point can be illustrated in these examples:

• You now need to include a more expensive fire suppression system than what was required when your building was originally constructed.

• An elevator may now be required for this style of apartment building, when previously it was not.

Remember, your insurer’s main concern is to help put their claimant back into the same position that they were in immediately before their loss occurred. Sometimes local bylaws and building codes won’t allow this. For purposes of discussion regarding the scenario described in this article, if you have the “blanket by-laws” endorsement, you should be OK. That being said, don’t forget to insure your building for what it would actually cost to replace it to comply with today’s standards.

The “Building By-laws” endorsement is not automatically included in your property insurance policy, so be sure to ask your insurance provider for its inclusion.

Is it a necessity? Most lenders of real estate secured loans require its inclusion as a part of their insurance conditions for granting a loan or mortgage. However, this endorsement is sometimes overlooked and its absence can be severely detrimental to your claim settlement for large losses to your income property.

This article appeared in the June 2007 issue of Canadian Apartment Magazine.