Viewpoint: Riots Expose Serious Deficiencies in Property Insurance Policies

The riots that took place in the Minneapolis-St. Paul area during the George Floyd protests caused serious damage to many buildings. Several building owners, to their dismay, found their property insurance policies failed to properly respond to the debris removal costs that were incurred to dispose of the damaged property and the uninsured loss owners incurred from the operation of building laws or ordinances, such as demolition costs.

This article will explore these issues in further detail. What went wrong? What should have been done to properly insure these buildings? Many property insurance policies use Insurance Services Office forms or policies that heavily use ISO policy language. As such, this article will analyze the following ISO forms and how they provide coverage for debris removal costs and loss caused by the operation of building laws or ordinances:

A. Building and Personal Property Coverage Form, Insurance Services Office, 2011, Form No. CP 00 10 10 12.

B. Causes Of Loss – Special Form, Insurance Services Office, 2011, Form No. CP 10 30 10 12.

The ISO Building and Personal Property Coverage Form provides coverage for debris removal costs in Section A.4.a. on page 3 of the policy form. It pays up to 25% of the sum of the deductible plus the amount the insurance company pays for the direct physical loss. However, when the combined direct physical loss and debris removal costs exceed the limit of insurance for the building, recovery for additional debris removal costs is limited to $25,000.

So, in a serious or total loss situation, if the business owner has not selected an amount of insurance adequate to pay for both 1) the costs to rebuild the building and 2) the debris removal costs. They will suffer a substantial and potentially devastating uninsured loss. In my 35+ years as an insurance consultant, I have never had a new client with only a single business location that had the proper amount of insurance on their building. The building owner and/or insurance agent never accounted for debris removal costs in a serious or total loss situation.

I believe the owners and their insurance agents only thought about the amount of insurance necessary to rebuild their buildings. They needed to select a policy limit that was adequate to rebuild the building and pay for debris removal costs.

So, for a building that would take $1 million to rebuild or replace, a building insurance limit of at least $1,250,000 is needed. I say at least $1,250,000 is needed because there may be certain situations where more than 25% of the building limit will be needed for debris removal costs. If a building is located in a dense urban environment, debris removal costs could exceed 25% of the building’s replacement cost value.

One of the issues that increased the debris removal costs according to a report in the Minneapolis Star was:

“Contractors acknowledge that prices for riot-related work are far higher than usual, but they said that is because government regulations require them to treat all debris from a burned-out building as hazardous. Industry veteran Don Rachel said those rules can double demolition costs.”

This issue does not affect the insurance recovery under the standard ISO forms. While the ISO Causes of Loss – Special Form has a pollution exclusion, this exclusion does not apply to loss or damage caused by “specified causes of loss.” “Specified causes of loss” is defined to include fire, vandalism, riot and civil commotion. Policy Reference: Sections B.1.l. on page 4 and G.2. on page 10 of the Causes of Loss – Special Form, Insurance Services Office, Inc., 2011, Form No. CP 10 30 10 12.

Section B.1. on page p. 1 of the Causes of Loss – Special Form excludes any loss arising out of the operation of Building Laws or Ordinances. Three kinds of loss can arise out of the operation of Building Laws or Ordinances:

For example, under Wisconsin’s building code law, Wisconsin Statute 66.0413, it states:

Section(1)(a)1. If a building is old, dilapidated or out of repair and consequently dangerous, unsafe, unsanitary or otherwise unfit for human habitation and unreasonable to repair, order the owner of the building to raze the building or, if the building can be made safe by reasonable repairs, order the owner to either make the building safe and sanitary or to raze the building, at the owner’s option.

Section(1)(c). Reasonableness of repair; presumption. Except as provided in sub. (3), if a municipal governing body, building inspector or designated officer determines that the cost of repairs of a building described in par. (b) 1. would exceed 50 percent of the assessed value of the building divided by the ratio of the assessed value to the recommended value as last published by the department of revenue for the municipality within which the building is located, the repairs are presumed unreasonable for purposes of par. (b) 1.

The ISO Building and Personal Property Coverage Form provides very limited coverage for any loss arising out of the operation of Building Laws or Ordinances. It only provides Increased Cost of Construction coverage. No coverage is provided for Demolition Costs or for the cost to rebuild the undamaged portion of a building required to be demolished because of building codes. See Section A. 4.e. on page 5 of the policy form for reference.

The policy limit for this Increased Cost of Construction coverage is minimal. The most the policy will pay is the lesser of $10,000 or 5% of Limit of Insurance applicable to the building. So, if a building owner only has the standard ISO Building and Personal Property Coverage on his/her policy, he/she could be in for a very nasty surprise should their building suffer a serious property damage loss.

What is the solution? The property policy needs to have an Ordinance or Law Coverage Endorsement, Insurance Services Office, Inc., 2011, Form No. CP 04 05 10 12, that has adequate insurance limits for:

• Coverage A – Coverage for Loss to the Undamaged Portion of the Building
• Coverage B – Demolition Cost Coverage
• Coverage C – Increased Cost of Construction Coverage

In my opinion, it was the building owners’ insurance agents who failed them. The agents should have known better. The insurance agents should have advised their clients of the need to adequately insure against a serious or total loss, i.e. enough to replace buildings and pay for debris removal costs. Is this not the purpose of insurance, to protect against a catastrophic loss? They should have researched the local building codes that would apply to their clients in the event of a serious or total loss.

Unfortunately, under Minnesota law, the agent is an order taker and has no duty to properly advise their clients on the adequacy of their insurance. So, there is no legal incentive for agents to do a better job.

Insurance companies also deserve blame here. They are the ones who see thousands of property insurance claims per year. In today’s world, I assume a good number of these claims are catastrophic losses, i.e. hurricanes, tornadoes, wildfires. What do they do to warn/advise their agents and their policyholders about the problems of inadequate debris removal cost coverage and the effect of building codes? Quick answer: Little or nothing, mostly nothing.

Obviously, insurance agents and insurance companies need to do a much better job of advising their respective clients and policyholders in these areas. Courts should start holding agents responsible for not properly advising their clients on the insurance coverages needed to properly insure/protect them. Unfortunately, in most states, an insurance agent is an order taker.

Agents should demand that the insurance companies they represent provide claims data on demolition costs, costs to bring older buildings up to current building code standards and local building code requirements. Insurance companies are in the best position to provide this kind of information.