What is demolition & increased cost of construction coverage?

A typical introductory conversation between an insurance agent and customer that revolves around how much coverage is needed on building policy will usually neglect one of its most crucial parts – Demolition & Increased Cost of Construction.  Policyholders are well versed in how much their building is worth in the real estate market, but are they aware of its replacement cost?  The answer is usually no.

Owners of older buildings will be well served by a conversation about demolition & increased cost of construction coverage, since the purpose of this coverage is to protect the policyholder from current requirements of building standards by ordinance or law.  A policy that is properly endorsed with replacement cost coverage is responsible for restoring the structure to its current condition regardless of depreciation.  If an older structure is damaged, is it possible to “replace” it to its current condition?  The answer is more than likely no.

Ordinances and laws are in a constant state of flux, and are frequently amended to improve the building standards of structures in a community.  Without the demolition & increased cost of construction endorsement on a building policy, the owner would be responsible for any needed compliance to current standards.

For instance: a building could be partially damaged by fire, and costs to repair this damage would be covered by a typical building policy.  What happens if the local authority where the building is located mandates that, due to the building’s age, a partial repair cannot occur to the structure?  It must be demolished and rebuilt in its entirety to comply with current standards.  A policy that is endorsed with demolition & increased cost of construction would provide coverage for this situation up to its limit of liability.

While this coverage part may seem to apply in rare situations, claim statistics show that this is not the case.  It is not possible for any one insurance carrier to provide coverage suited to every city or town’s requirements.  This endorsement is a necessary complement to “replacement cost” coverage and assures the policyholder that even the unknown cost of construction is covered.