May 2009


"Our Board is really frustrated.  Our insurance agent is insisting that we add a coverage called Building Ordinance.   Why the heck do we need to spend more money on coverage like this?   Our building was built in 1964 and we like it just like it is.   We want the basics.   We don’t need a bunch of extra “bells and whistles.

                        -Pablo F., West Hollywood

Dear Pablo,

Insurance carriers writing coverage for condominium associations are contractually obligated to indemnify the Association against certain types of losses. To “indemnify” means the insurance carrier must “put your Association back to where you were prior to the loss.” Nothing less, nothing more.

If your building was built in 1964, that means the carrier would cover only the costs required to restore the building to its exact condition at the time of loss.

You might be thinking that’s just fine, but wait!

Because of significant fire safety, life safety and building stability changes to the building code in the intervening years, just being restored to where you were prior to the loss won’t be good enough. Your City's or County’s Department of Building and Safety won’t issue a building permit unless you agree that the building will be restored to a better condition than it was prior to the loss; one that complies with the current code.

That can be expensive.

For example, many communities now require residential fire sprinklers at the time of reconstruction. That could add $3 to $4 per square foot to the replacement cost. For an average 50-unit condominium association, this could mean an additional $270,000 to $360,000 just for the design, installation and testing of fire sprinklers that weren’t there originally.

Numerous code changes have also resulted from research into improved construction techniques and materials in the aftermath of the Oakland Firestorm and Northridge Earthquake. These two catastrophes influenced additional fire and life safety improvements. As a result of the Northridge quake, builders were forced to undertake major seismic construction upgrades, including beefed-up re-bar in concrete footings, and shear walls to prevent lateral movement during an earthquake.

Fortunately, there is an optional insurance coverage which can address these code changes. It’s called “Building Ordinance*” coverage. Building Ordinance provides three distinct coverages designed to help cover the costs necessary to bring your building back up to code. They include:

  • Loss of Value: This covers the loss of any undamaged portion of the premises which had to be demolished in order to bring that portion of the real estate up to current code.
  • Demolition: This coverage protects against costs incurred where demolition is necessary to remove portions of the premises which don’t comply with current code.
  • Increased Cost of Construction: This coverage protects the Association against those additional costs necessary to replace portions of the existing building with building materials/installation techniques that will comply with current code.

Will the code changes always be forced upon the Association? That depends on the extent of your loss. In some communities, if less than 10% of the building is damaged, the Department of Building and Safety may choose not to enforce the code changes. If more than 10%, but less than 50% of the building is damaged, they may require that the damaged portions of the building are brought up to code. If more than 50% of the building is damaged, they may require the entire building to be brought up to current code standards.

Determining how much code upgrade coverage to maintain is difficult. Most insurance professionals recommend a minimum of 10% of the Association’s overall building value. . Certainly, higher limits (25% or 50%) may be warranted depending on the age and construction of the project. If your building was constructed prior to 1950, getting this building code coverage is important but carriers may be reluctant to offer it.

It’s best to talk with your insurance professional about this coverage. If you have access to an architect or engineer in your project, they may be able to educate you and your Board about the specific changes/challenges your Association may face at the time of reconstruction.

*Sometimes referred to as “Contingent Liability from Operation of Building Laws” or “Code Upgrade” coverage.


Coming Soon to a Carrier Near You

Soon, some California admitted carriers will be offering green coverage endorsements.  

What is “Green Coverage”: A new endorsement available for purchase from participating carriers.  It is to cover the cost to rebuild and replace condo property with specified green alternatives such as: Non-toxic paints and carpeting, Energy-Star® rated electrical equipment, roof and insulation materials, energy-efficient lighting systems and water efficient interior plumbing.

Some carriers offering green coverage will allow policyholders whose home has been partially damaged to repair it with environmentally preferable materials such as Energy Star lighting and ventilation, sustainably harvested wood, and nontoxic paints and carpeting.

What that means for you: HOA policyholders whose buildings have been partially or totally damaged will have the option to replace their existing standard systems and materials with green ones.

A Possible Scenario for your Association:
Let’s say you have a catastrophic fire and your condo is totally destroyed, but you had already bought New Green Upgrade Coverage.  In that case, your carrier offers you up to $25,000 to hire a LEED-certified architect to oversee the rebuilding and LEED application process.  Once these steps are taken your condo will be rebuilt, up to its limits, according to the “Leadership in Environmental and Energy Design, or LEED, standards” set by the U.S. Green Building Council.

The Benefits of Going Green:
On top of helping the planet by reducing your “Carbon Footprint” you can also save and make money by going green.

One significant monetary benefit of having a building up to “green-code” is that with a greener building you get improved energy efficiency which translates as lower energy costs to heat and cool your building. 

Another fact: A 2008 study indicates that LEED (Leadership in Energy and Environmental Design) certification or the Energy Star label buildings outperform their non-green counterparts in occupancy, rental rates and sale prices.

What is LEED and how can you Learn More: LEED is an internationally recognized certification system that measures how well a building or community performs across all the metrics that matter most: energy savings, water efficiency, CO2 emissions reduction, improved indoor environmental quality, and stewardship of resources and sensitivity to their impacts.

LEED applies to all building types – commercial as well as residential.

To learn more about LEED, please visit the U.S. Green Building Council web site
This letter contains only a general description of coverage and is not a statement of contract. For a more detailed description of the policy conditions and exclusions, please consult the policy itself.
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