Commercial building owners may think that replacement cost insurance is sufficient, but it may not be enough to protect from a major financial loss. Many people believe that their policies are enough to completely replace a destroyed building. However, this is often far from the truth. This false sense of security may leave people who experience loss with the bitter realization that coverage has stipulations. This is especially true if the insured building is old. Even if a building does not change substantially over the years, local building codes change frequently. Building codes in place at the time of the structure’s original construction may also be considered.

Many cities have ordinances requiring buildings to be demolished if more than 50 percent of the structure is damaged. If reconstruction is performed, current codes must be used. Unfortunately, some codes change to prohibit building the same type of structure in the area. For example, a funeral home that burns down 75 years after construction may not be rebuilt in the same spot. The area may have originally been zoned for such a business, but the neighborhood may have changed into an area with mostly houses. If the area has recently been zoned to accommodate residential buildings only, the owner of the business would have to rebuild elsewhere. The unfortunate part in such a case is that land may be more expensive somewhere else, and the value of an empty lot may not be enough to cover it. There are also accessibility issues to think about.

If a damaged building lacked ramps, remote doors and accessible toilets, the owner may have to make adjustments when rebuilding. This could end up costing more money. Standard commercial property insurance does not offer much coverage for such costs. The majority of insurers pay either $10,000 or five percent of the building’s insurance amount. Whichever amount is less is what is paid. This small amount of compensation can easily be used up by demolishing the building, bringing the building up to code or starting new construction elsewhere.

It is important for building owners to think about buying extra coverage for such possibilities. Most insurers offer special law or ordinance coverage for an extra premium amount. Unless the costs result from failure to comply, the bills for demolishing and rebuilding are covered. There are three specific types of coverage for specified buildings, which include the following:

• Coverage A includes loss to the building’s undamaged portions.

• Coverage B includes the cost of demolishing undamaged parts of the building.

• Coverage C includes the heightened cost of repairs or construction to meet new codes and ordinances.

The amount of insurance for Coverage A is equal to the amount of coverage for the whole building. For Coverage B and Coverage C, there are separate amounts assessed. This type of insurance protects the owner only for the cost of replacing or repairing a damaged structure. However, lost income due to construction is not covered. There is separate coverage available for income loss. To learn more about that type of coverage, discuss the options with an agent. Unwanted surprises from unexpected disasters are harsh for business owners, so it is important to be prepared with adequate insurance.