Dealing with the aftermath of a windstorm in your tree-lined neighborhood can be overwhelming. Imagine the shock when a massive oak tree crashes through the center of your house, necessitating the costly process of demolition and rebuilding. While your insurance may cover wind damage, it often falls short when it comes to the substantial cost to demolish and rebuild your home.
One important aspect to consider is the building ordinance or law coverage clause in your homeowners' policy. This clause can significantly affect your coverage for the cost to demolish and rebuild. Despite the windstorm being a covered peril that caused the damage, the expenses associated with bringing your home up to current code standards are typically not covered.
What does this mean for you? A big out-of-pocket cost you weren't expecting.
Even with a tree in your living room, you may not be covered for the full cost of rehabbing your home if your homeowners policy contains a building ordinance or law exclusion or limitation. But you can plan ahead now and get additional coverage to help protect your budget and specifically address the cost to demolish and rebuild your home – before that giant oak becomes an unwelcome house crasher.
How do rebuilding costs affect your insurance?
Types of Building Ordinance or Law Coverage
The main purpose of any homeowners insurance is to return your property to the same condition it was in before the loss. A building ordinance or law endorsement extends your homeowners policy coverage over parts of your home that are undamaged by a covered peril (such as a tree) but must be repaired or upgraded to satisfy a community building code.
Consider these building ordinance or law coverage endorsements:
1. Loss to Undamaged Portion Coverage
Let’s say the insurance company has determined that 70% of your house’s structure is damaged because of the impact from the oak tree. Insurance will pay for repairing the parts damaged due to the impact. But when you’re applying for construction permits, the city informs you that structures damaged beyond 50% must be completely rebuilt, not just repaired - you must demolish and rebuild your home – The limit on your standard homeowners policy is $300,000. Is it enough?
You might be covered for some of the cost to rebuild, but it depends on the wording of the policy coverage and the overall limits of your policy. The standard limit on building ordinance or law coverage is usually 10% (typically, defined under dwelling coverage A). The contractor quotes you $60,000 to rebuild the undamaged parts of your house. Your 10% limit pays on $30,000. You’re looking at covering a $30,000 coverage gap out of your own pocket. Increasing your building ordinance or law coverage limit to 20% (instead of the standard 10%) could help close the gap.
2. Demolition Cost Coverage
Before you think the gap is closed – the house isn’t going to tear itself down and clean up afterwards. You might have some coverage for the cost to rebuild the damaged portion, but not the cost to demolish and remove the debris for the undamaged parts. But will it cover your costs? You guessed it – it depends.
The demolition cost endorsement covers the cost to demolish and remove the debris of the undamaged portion of the building (if building ordinance or law requires it). Without any extra coverage endorsements, you’re forced to share the 10% standard homeowners’ policy coverage across both costs to demolish and rebuild. Even if you increase coverage from 10% to 20%, you might still be stuck with some out-of-pocket cleanup costs beyond the $60,000 to rebuild.
Again, think of the worst-case scenario in terms of cleanup costs such as machinery, labor, and disposal fees. If you secure a building ordinance or law endorsement to insure 25% of your overall homeowners’ limits, you’ll have $75,000 for the overall project. That leaves you with an excess of $15,000 for demo costs.
3. Increased Cost of Construction Coverage
Even if your home isn’t forced into a complete demo and rebuild, you might end up having to rebuild your home to code anyway.
For example, if only 35% of your house has structural damage but the city inspector mandates electrical and plumbing upgrades, you could face an additional cost of $40,000. With the standard 10% coverage, you would receive $30,000 from your $300,000 policy, leaving you with $10,000 to finance yourself. The standard homeowners' policy for building ordinance or law leaves room for some coverage (normally 10% of the limits), but it doesn’t always leave you fully compensated Increasing the coverage limit to 20% can provide better protection against these out-of-pocket costs to demolish and rebuild.
Don't leave yourself exposed with a standard policy. Familiarize yourself with local building ordinances and codes to ensure compliance. Special codes may apply based on your property's zoning classification, and subdivisions within a city may have their own unique requirements. Additionally, inquire about any time limits imposed on the rebuilding project. Depending on the age and value of your home, you might face a substantial financial investment on top of an already stressful situation.
Contact Sharon Meadows today to see if you have the right coverage.