Adjusting Building Restoration Claims
Remember the days of the wrecking ball? The great crane of destruction would mechanically implant itself; then, as onlookers stared, mouths agape, the iron sphere of death would careen into the side of an aged building, bringing it down to make way for a new and better structure.
Well, that drama has recently been giving way to a kinder, gentler method of updating. In locales across the nation, many older buildings—particularly those with historical significance—are being rehabilitated or renovated instead of destroyed. The techniques, procedures and financing involved in rehabilitation differ appreciably from ground-up construction and can present some of the most complex and problematic types of claims faced by an adjuster.
The two methods of non-destructive updating—rehabilitation and renovation—bear on the claims process. Rehabilitation usually requires a change or interruption in the structural integrity of an existing structure. It affects load-bearing structural members and encompasses a change in the fire division characteristics. Renovation, or remodeling, involves the replacement or removal of partition walls, electrical, plumbing, HVAC, or other systems or interior/exterior cosmetic alteration, modernization or repair.
In both cases, construction does not always go as planned, and sometimes a claim results. The following represents our top-10 list of the major concerns (not in order of importance) that adjusters will likely face, as well as some thoughts about each to assist in the adjustment process.
- Valuation of the damages sustained presents the first unique consideration, particularly when looking at a rehabilitation project. Initially, one must consider that the existing structure and its worth are likely to be unrelated to traditional ACV or replacement cost treatment based on provisions common to builders risk contracts. The primary reason for this is that the existing structures were usually acquired at costs far lower than their replacement cost. Insurance valuation of the existing structure is likely to be on an agreed value basis initially, and there could be beginning, intermediate and completed-value mileposts as the rehabilitation progresses.
- Building Code changes are another consideration. The codes today are likely to be quite different from the codes in effect when the building was constructed. Additionally, from the time the plans for restoration are finalized and work begins to the time when a potential loss occurs during the course of restoration, code changes may be enacted. For example, possible substantial improvement in materials or supporting members might be indicated because of mandated earthquake-resistant construction changes, or new materials might be called for because of “green building” code changes.
- Financial or tax abatement considerations could be necessary. The financing might have been arranged in more favorable economic times, or the economic assumptions underlying the project might have changed appreciably. With many of these projects occurring in inner city or historically significant areas, local municipalities might have granted a lengthy tax abatement period to encourage the investment. Any loss could affect one or both of these considerations.
- Site Security should be an integral part of the underwriting and loss mitigation process and might prove to be a source of information for adjusting. Renovation and restoration efforts tend to elicit strong community reactions—both positive and negative. More than one project has found itself exposed to thieves, vandals and other intruders. Surveillance cameras or CCTV, neighborhood watch programs, and contractor incentive programs for the community to “watch over” the project can all provide helpful information in the claims adjustment process.
- Availability of replacement materials of like kind and quality might add to the cost of adjustment, as they are often not available at the local “big box” store or lumberyard. Frequently, renovation projects involve buildings that have different dimensional lumber specs or custom millwork needed to replicate the damaged material, thereby requiring higher claims adjustment considerations.
- Since renovation projects are often unique to themselves, contractors will procure customized insurance contracts, which have policy provisions to which adjusters must adhere. In reviewing the contract, adjusters must look for soft cost coverage. There is a big distinction between so-called “hard costs” (bricks and mortar) and soft costs. Soft cost issues run the gamut from the tax abatement and debt service previously mentioned to loss of income, loss of rents, delayed opening, additional advertising and promotional expenses, cost of renegotiating leases, and many other innovative, negotiated items. The only way to understand these additional insurance coverages is to obtain a copy of the policy.
- The approval process can extend the period of restoration. That process can require arduous and drawn out negotiations with permit-granting authorities outside of traditional municipal building departments, particularly regarding adherence to historical site or newly codified rebuilding standards.
- The period of indemnity, as measured by the delay in completion of a project, caused by or the result of a loss, can often be difficult to measure, particularly when delay may have been caused by a number of different issues, including repair of the damage, stoppages of work by authorities, and/or forces unrelated to the loss itself.
- The contract(s) for construction in place from the commencement of construction will affect both the course and the cost of rebuilding. The notion that market pricing will determine repair costs affecting loss adjustment is often outweighed by the practical reality that only those contractors engaged at the project will be involved in the repair of the damage.
- The need to expedite repairs must be carefully measured against the corresponding effect that expediting may have on the performance of existing work unrelated to the loss and whether the effort to expedite ultimately serves to mitigate the effects of the loss.
A final consideration for the claims adjuster unfamiliar with the nuances of these types of claims might be to engage the services of a third-party professional organization that specializes in consulting on renovation claims. With all the variables encountered—historical components, regulatory requirements and code issues, historical significance and methods of valuation—this might be the most prudent step in the entire adjustment process.
Ronald G. Thornton, CPCU is president & CEO of the Inland Marine Underwriters Association (IMUA). Jonathon Held is president of J.S. Held, Inc., a nationally recognized construction and claims consulting firm. Donna J. Popow (firstname.lastname@example.org) is senior director of knowledge resources and ethics counsel for the American Institute for CPCU/Insurance Institute of American (the Institutes).