The HOA Board Quarterly Fall 2013 Issue #7 | Page 13

Lenders Requesting Building Ordinance and Law Coverage be reflected on Certificates of Insurance By Michael Berg R ecently, lenders started making requests of insurance professionals to include information on insurance certificates that wasn’t requested in the past. For whatever reason, lenders have become hyper-sensitive to the insurance in place for a homeowners or condominium owners association. They want to know about replacement costs, coverage for a unit interior, severability of interests, policies covered under an umbrella policy and a host of other information that has never been an issue. Because Building Ordinance and Law are actual three different items, we thought we’d dig a little deeper into this one. Building Ordinance and Law is usually included in an HOA master policy, but it may need to be endorsed to the policy, depending on the carrier. There are three coverage categories included: Coverage A – Contingent Liability, Coverage B – Demolition and Debris Removal, and Coverage C – Increased Cost of Construction. Each will have a separate limit and coverage triggers. For the sake of our discussion, assume we are talking about a fire in a 4-unit condominium building. Coverage A – Contingent Liability covers the loss in value of an undamaged portion of a building due to demolition pursuant to a building ordinance or law. Take our 4-unit building and damage three of the four units with fire. A city building ordinance may limit the size of the building allowed to only three units. Meaning, there will be a unit lost, and the lost value of that unit is paid for under Coverage A. demolish the undamaged unit and haul away the debris. Coverage C – Increased Cost of Construction covers the cost to repair, reconstruct or remodel damaged or undamaged parts of the building to comply with current building ordinance, code or law. Pretend our 4-unit building was built in 1970, and the wiring is all aluminum. If the building is damaged, the wiring will need to be upgraded to copper per current building code. Coverage C will pay this additional cost. Keep in mind, the insurance policy already includes the cost to replace wiring. The code upgrade cost isn’t the cost of re-wiring the building. It is only the difference in material cost from aluminum to copper. In reality, Building Ordinance and Law coverage is rarely used. But as buildings age and codes change, there is more and more likelihood for the coverage to become an integral part of the claims process. At least for now, homeowners and board members will have a little better understanding of what the words mean when they show up on an insurance certificate. Michael Berg Berg Insurance Agency 23651 Birtcher Drive Lake Forest, CA 92630 [phone] x216 www.BergInsurance.com [email protected] Coverage B – Demolition and Debris Removal applies to the cost to demolish and remove debris of an undamaged portion of a building if demolition is required by building ordinance or law. In our fire, three of the four units were damaged. Fire is the quintessential covered peril, so we will build back the three damaged units. But, a city ordinance says we have to knock down the undamaged unit and reconstruct from the ground up. Because the undamaged unit was not affected by the fire, the cost to comply with the ordinance would not be part of the claim. Coverage B will pay the cost to Fall 2013 | Issue #7 | The HOA Board Quarterly | 13