Ordinance or Law Coverage--Properly Protecting Your Buildings

There’s a provision that most standard insurers don't cover: Ordinance or Law. Many insurers give the option to insure for Ordinance or Law losses, but most don't come standard. But what is Ordinance or Law coverage for? What happens without it?

Every community has building and zoning ordinances, and these ordinances are constantly being modified and reinvented as new technology and information comes out. Easy examples would be the banning the use of asbestos and the requirement of egress windows being used for basement bedrooms. These and many other ordinances and laws come into play when a certain percentage of your building is destroyed (the exact percentage depends on your current city code, but is typically 50%), or when certain things need to be replaced. The coverage comes into play because the basic insurance policy itself often only covers you to replace to the exact same condition to what was lost, instead of up to the new code standards. Let me show a few examples.

For my first example, let's say you have a $200K home built in 1910, and (for simplicity’s sake) a storm destroys exactly half of your home. Being half destroyed, the city ordinance requires you to rebuild the whole home up to current standards. In this case, the standing part of your home must be demolished and rebuilt, even though it is technically undamaged. With Ordinance or Law coverage, the cost to demolish the standing portion would be covered, along with any increased costs of construction from building up-to-code. Without Ordinance or Law coverage, you would be held responsible for all of the demolishing and extra rebuilding expenses.

The next example pertains more to commercial property owners. Let’s say your building was completely destroyed. The insurance company is going to pay to rebuild, but the problem is that the city has rezoned, or new land use ordinances have been created. These new laws may require you to move your building elsewhere. The extra cost of the new land would not be covered without Ordinance or Law coverage. Also, you may be required to rebuild in a completely different fashion. Due to the Americans With Disabilities Act of 1990, you may be required to rebuild with the building being accessible to those who are physically disabled. That may require elevators, entryway-ramps, widened doors, raised toilet seats, etc, that weren't there previously. These increased costs would not be covered without Ordinance or Law coverage.

Laws and ordinances are being changed all the time. If your home or commercial building is fairly old and hasn't been remodeled or changed much since it was built, you’re at even more risk in the event of a loss. Remember that undamaged parts of your building may have to be remodeled or completely rebuilt to satisfy the new codes. Also, the new materials and structures that are needed can drive up costs as well. Don’t worry if you can’t keep up with all the new laws, just make sure you are properly insured to cover anything in the event of a loss. Please contact your agent to see what it would take to properly cover you! 

Note from the Author (Nov. 14, 2014): After two years of work, we've entirely redesigned our website! Using SquareSpace, we were able to import this blog and we are continuing our blog there. To find the current version of this article and our new articles, click HERE.

Understanding Uninsured & Underinsured Motorist Coverage

This article will explain the significance of these coverages by discussing their functions, using likely scenarios for examples, and providing possible consequences of having too little coverage. It will discuss minimum state limits and how to avoid being an Underinsured Motorist yourself. It will also discuss what to look for when buying these coverages.

What is the Difference Between an Uninsured Motorist (UM) and an Underinsured Motorist (UIM)?

An Uninsured Motorist is just that: someone with no auto insurance. Statistics show that 1 out of every 7 drivers (14% of drivers) in the US does not have any insurance. That’s over 45 million uninsured drivers. Alarming as this is, your Uninsured Motorist coverage will step in and act like the other party’s insurer in the event of a collision with someone uninsured. So if the other party was at fault, your insurer will pay you, up to your Uninsured Motorist coverage limit, as if they were the other party’s insurer.

An Underinsured Motorist is someone driving with insufficient levels of liability/property coverage. The Underinsured Motorist coverage comes into play when the other party is at-fault for the accident, and their insurance policy limit isn't high enough to cover everything they’re liable for. Like the Uninsured Motorist coverage, Underinsured Motorist coverage then steps in to act like the other party's insurer to pay for the damages that the other party can't cover, up to your Underinsured Motorist coverage limit. 

While an Uninsured Motorist is easily defined, determining whether you are an Underinsured Motorist or not is a hard thing to do until you cause an accident. Determining if you have a sufficient amount of coverage is entirely dependent on the severity of the accident you cause. For example, if you cause a simple fender bender, you might only be liable for a few hundred dollars. That's to fix the bumper and for a chiropractic session for the person you hit. However, a serious accident involving multiple people could easily add up to be hundreds of thousands of dollars!

The Problem with Minimum State Limits

The state of Nebraska has a minimum limit of liability every driver must have to be considered an 'insured driver'. That requirement is a split limit of $25,000 of bodily injury per person, $50,000 total bodily injury, and $25,000 property damage liability (often notated as "25,000/50,000/25,000" or "25/50/25"). While those limits are all you need to be a state-approved 'insured driver', think of the risk you're taking with those low limits:

• You hit a Lexus: luxury cars take luxury parts, along with costly import or dealer service. Even a relatively minor accident might not be covered by the $25,000 for property damage.

• You hit a car with three people in it: Let’s say each one of the other car’s occupants receives $20,000 of medical care. That still leaves you with $10,000 out-of-pocket. ($50K of total body injury insured, with 3 people x $20K = $60K, leaving $10K uncovered) Now imagine a more severe accident with a small sedan that has five people stuffed into it!

• You get in a serious wreck with a sports car with only one person in it: You destroy their new Corvette, which leaves you out-of-pocket roughly $25,000 for the property. Their spinal surgery and physical therapy adds up to $150,000. That’s $125,000 of bodily injury that you’re still liable for. 

What Happens if I Do Not Have Enough Liability?

In the minimum state limit examples, the amounts not covered by your insurance would be completely up to you to cover. In most cases, you can expect a court date to determine negligence and how much you owe the other party. The amount you owe will most likely be taken in the form of garnished wages or other means until things are evened out.

But What If They Have Underinsured Motorist coverage?

If they do, their insurance company is going to step in and take care of all of their immediate bills on your behalf, since you were driving without proper coverage (at least, 'improper' for the accident you caused). The other party's insurance company will come back and sue you for everything you rightfully owe (this is called Subrogation), so refer to the previous section. (Note that in the opposite situation where you're not the one at fault, if your insurer pays you through UM or UIM, your insurer will sue the other party to make them pay for what they owe [Subrogate them])

What Should I Look for When Buying UM/UIM Coverage?

To protect yourself from a hit-and-run or not-at-fault accidents where the other driver doesn't have/doesn't have enough insurance, you'll need UM/UIM coverage. Typically, UM/UIM is sold as a single coverage, however, it often only covers your bodily injury. If you do not have Comprehensive and Collision coverage on your car, make sure UM/UIM for property damage is covered, or see if it can be endorsed to the basic UM/UIM coverage.  

How Do I Avoid Being an Underinsured Driver?

Accidents are accidents; they’re statistically going to happen to everyone. You never know if the accident is going to be a simple scuff in the parking lot, or a catastrophic event. Moreover, there is technically no way to know that you will or won't be an Underinsured Driver. However, you can take a few simple precautions that will severely limit your chances of being Underinsured: through higher limits on your auto policy, safe and defensive driving, and an umbrella policy covering excess damages, you can drive knowing you're protected for almost anything.  

What are These Precautions Going to Cost Me?

Defensive driving is free, saving you from accidents and maybe even traffic tickets along the way. Insurance wise, to bump up the liability limits from minimum level (25/50/25) to $300,000 across the board (300/300/300) is typically not very much, often costing and extra $100 or so per year. Likewise, a $1,000,000 Umbrella policy usually costs around $200 per year, and the Umbrella policy will give you additional liability coverage to your auto policy and your Home/Renter's policy! Excess liability is extremely cheap, especially when you consider what could happen without it!

Note from the Author (Nov. 14, 2014): After two years of work, we've entirely redesigned our website! Using SquareSpace, we were able to import this blog and we are continuing our blog there. To find the current version of this article and our new articles, click HERE.

A Debate: Replacement Cost vs Actual Cash Value

These two loss settlement options are given on almost every property-covering policy you’ll see. What’s the difference between Actual Cash Value and Replacement Cost though? How does it apply to your home or commercial building? How does it apply to your personal property? 

What are Actual Cash Value (ACV) and Replacement Cost (RC)?

There is a huge difference between ACV and RC. Starting with Actual Cash Value, it is commonly defined as the ‘fair market value’ of your property. With ACV, a rough estimate of what you will receive after a claim will be what the property could be sold for at auction/online. However,the actual insurance definition for ACV is: "Replacement Cost minus depreciation of the property." To work with the exact definition, we need to know what Replacement Cost is, and how it works.

Replacement Cost is the full cost to replace your property with like-kind and quality, without any deduction for depreciation. Here’s an example. You have a flat screen TV that you bought for $3,000 in 2010 and a fire completely destroys it. If you had it insured for RC, you would receive a brand new model of the exact same flat screen (if one could be found), or the modern equivalent of it, even if it costs more. If it were ACV insured, you would only get the current market value of the TV, which might be less than $1,000 now.

How Does Replacement Cost & Actual Cash Value Apply to My Home/Buildings?

An example of RC would be if your home was insured for replacement cost and suffered a total loss. For this example, (and for simplicity’s sake), let’s assume your house is worth $100K on the market. However, the cost of rebuilding a home, or any structure, is typically more expensive than the market value of the home (after a building is originally built, its market value and the value of the inputs have all changed. These changes in value are caused by inflation, increased costs of labor, increased costs of materials, different types of materials needed, new technology, shifts in housing market, different laws and ordinances governed on the erection of a building, etc.). So if you had a total loss, replacing the $100K home to its former condition might cost $200K. That’s $200K to rebuild your home in the exact same fashion it was before the loss. In this scenario, you would receive a completely new house, built for $200K, even though it was only worth $100K on the market.

Conversely, let’s say we had the same loss on the same house, but this time, it was insured for ACV. In the ACV example, you would only receive $100K (or $200K minus the depreciation). If you wanted your house repaired to what it formerly was, you would have to come up with $100K on your own, or you could have a smaller/less luxurious house built. 

The difference between ACV and RC is substantial come claim time, but is often overlooked because RC costs more. Make sure to discuss the true value of your home with your agent, and have them help you decide what the best option is for your situation.

Note from the Author (Nov. 14, 2014): After two years of work, we've entirely redesigned our website! Using SquareSpace, we were able to import this blog and we are continuing our blog there. To find the current version of this article and our new articles, click HERE.