In the last two years, an agent has had two property claims in which the cost of the restoration contractor was extremely high. One was a vandalism and malicious mischief claim where the building suffered heavy damage including fire. The other was a water claim.

Q: During these claims processes, I learned that the restoration contractor invoice is paid out of the building limit. This makes me uneasy for lots of reasons. How can I ensure that the cost of the restoration contractor is covered? Inflate the price of the building? “Debris removal" isn't a defined term in the property coverage form so I'm unsure if CP 04 15 would provide the coverage I'm seeking. 

Response 1: Great inquiry! You are correct—the costs to protect the property from further damage do not increase the limit of insurance. It is a contractual duty and there is no guarantee that the costs will be paid at all. But these expenses are not debris removal.

Currently, there is no standard ISO endorsement available to pay these expenses as “supplementary payments" in addition to the limits of insurance. I would be in favor of a supplementary payments provision in property insurance that would provide separate insurance coverage for expenses to protect covered property from further damage, “claims preparation" expenses and more. But typically, if the covered property is a total loss, there will be no need for mitigation costs. 

Take all reasonable steps to protect the covered property from further damage and keep a record of expenses, which will be helpful during settlement of the claim. This will not increase the limit of insurance.

Response 2: Attaching CP 00 15 could enable you to raise the limit but not expand the coverage for debris removal after a loss. Debris removal certainly comprises a share of the cost of restoration, but it is not the only factor involved in restoration. Consult with your underwriters when establishing the limits for properties insured on replacement cost. When doing so, do not inflate the price!

Response 3: You are correct that the cost of restoration contractors can be very expensive. It can include demolition, debris removal, construction of temporary structures to protect the property from further loss, cleaning fees, cost of the inventory process, valuations, storage fees for personal property while the policyholder and insurer sort out what can be cleaned and what is totaled, and the cost of cleaning goods that are not totaled. 

Some common losses, such as sewage or water damage and fires, also produce contaminants resulting in environmental issues that require special treatment during demolition, debris removal, disposal and cleaning that add more expenses. These costs can be shocking and could exhaust building and contents limits. 

Some policies have separate limits or percentages of limits for demolition or debris removal. However, often those limits are too low. Some insurers offer options to increase those limits and some do not. 

Also, consider that location can hugely impact such costs. For instance, a free-standing, single-story building with 360-degree clearance is easy to access but a high-rise building in New York City is difficult to access and will incur higher costs to perform the demolition, debris removal and clean up.

How to deal with these costs is not well addressed in the industry and the limits and percentages offered are antiquated. In some instances, the building and contents values are inflated to address those costs. In some policy forms, there is an additional provision that allows for an additional percentage if the amount of the loss and the debris removal expense exceeds the property limit. But even so, those limits can be too low and debris removal doesn't cover all the costs incurred such as those noted above. 

Another issue is that some insurers include some costs like inventory and appraisal—valuation of the damaged property—as an insurer claim cost while others deduct those from the policy limits. It indeed is a conundrum.

I am sorry to say there is no single solution. You will need to review the policy forms for the insurer with the specific client in mind to determine how to best address the potential costs. You might need to take a stab in the dark by inflating declared limits and adding available endorsements, such as the CP 04 15. Asking the underwriter for guidance and documenting how and why limits were developed might help at a time of loss. 

Response 4: Building coverage can be valued and the limit set at the replacement value of the building—that is, the cost to repair or replace the damage to the building at today's material costs of like kind and similar quality, plus labor costs.

Unless you have a special expertise in building costs, which insurance agents most often do not, setting the limit should be done by your customer, not you. You can certainly describe to your customer the valuation and the debris removal but it is up to your customer to choose a building limit. And don't forget code upgrade issues: ordinance or law coverage. 

Debris removal is not a defined term, but what constitutes debris removal is described in detail in the ISO Building and Personal Property Coverage Form. The debris removal limit is usually 25% of the value of the loss and plus 25% of the deductible. If the loss or debris removal exceeds the building limit, an additional debris removal limit of $25,000 is typically provided. 

This question was originally submitted by an agent through the Big “I" Virtual University's (VU) Ask an Expert service, with responses curated from multiple VU faculty members. Answers to other coverage questions are available on the VU website. If you need help accessing the website, request login information.

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