Coinsurance, Ordinance Upgrades, and the 72-Hour Wait
A fire at a 12-year-old restaurant causes $300,000 in building damage. The commercial property policy has a $1,000,000 building limit, an 80% coinsurance clause, a $10,000 deductible, and replacement cost on the building. The statement of values submitted at renewal lists building replacement cost at $1,500,000, but the insured intentionally listed it low "to keep premium down." The policy includes an ordinance-or-law endorsement with a $50,000 sublimit; the city requires $80,000 of sprinkler and accessibility upgrades before occupancy. Business income coverage has a 72-hour waiting period and a 12-month period of restoration; the restaurant will be closed 5 months, with monthly net income plus continuing expenses of $40,000. The insurer pays $210,000 building and denies the ordinance costs.
1. Calculate the building payment the insurer should make before considering the ordinance-or-law endorsement. Show the coinsurance computation.
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The coinsurance requirement is 80% of the replacement cost value: 0.80 x $1,500,000 = $1,200,000. The insured carried only $1,000,000, so the coinsurance ratio is $1,000,000 / $1,200,000 = 0.8333. The covered building loss is $300,000. Applying the ratio: $300,000 x 0.8333 = $250,000. Subtract the $10,000 deductible: $250,000 - $10,000 = $240,000. The insurer's $210,000 payment is therefore short by $30,000 before any ordinance-or-law analysis. The insured's intentional understatement of values does not create a defense to the coinsurance calculation itself; it simply means the insured bears the coinsurance penalty. The adjuster should verify that the $1,500,000 figure is the actual replacement cost at the time of loss and that the $300,000 loss is replacement cost, not actual cash value.
2. How should the $80,000 ordinance-or-law cost be handled under the $50,000 sublimit?
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The ordinance-or-law endorsement is a sublimit, not an increase in the building limit. The city requires $80,000 of upgrades before occupancy. The most the endorsement can pay is its $50,000 sublimit, leaving $30,000 to the insured, unless other policy provisions add coverage. The adjuster must read the endorsement to determine whether coinsurance applies to the sublimit. If the endorsement is true additional coverage and is not subject to coinsurance, the insurer pays $50,000. If the form applies the coinsurance ratio, the payable amount would be $50,000 x 0.8333 = $41,667. The insurer cannot simply deny the entire $80,000 because the cost exceeds the sublimit. It should pay the covered portion up to the sublimit, document the city citation, and explain the $30,000 shortfall to the insured in writing.
3. Calculate the business income loss, including the 72-hour waiting period, and explain any limitations.
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The gross business income loss is 5 months x $40,000 = $200,000. The 72-hour waiting period is 3 days. Using a 30-day month, the daily loss is $40,000 / 30 = $1,333.33; 3 days = about $4,000. The payable business income loss is therefore about $196,000, subject to the 12-month period of restoration and any policy limit. The waiting period applies once, at the start of the loss, not once per month. The adjuster should verify that the $40,000 figure is net income plus continuing normal operating expenses and that it does not include expenses that stop during closure. If the restaurant reopens sooner, the loss ends earlier. Extra expense may be separate. The insured must document lost sales, payroll, rent, and fixed costs; the adjuster should not simply multiply monthly revenue.