What is demolition cost coverage for apartment buildings?
Demolition cost coverage, part of ordinance or law insurance, pays to tear down undamaged portions of an apartment building when building codes require it after a partial loss.
When a fire or other covered peril damages a portion of an apartment building, local building codes may require demolition of the undamaged remainder if the damage exceeds a specified threshold—typically 50% of the building's value, though thresholds vary by jurisdiction. The standard commercial property policy does not cover the cost to demolish undamaged portions of the building, creating a significant coverage gap that ordinance or law coverage addresses.
ISO Ordinance or Law Coverage endorsement (CP 04 05) provides three distinct coverages. Coverage A pays for the loss in value of the undamaged portion of the building that must be demolished. Coverage B—the demolition cost coverage—pays for the actual cost to demolish the undamaged portion and remove the resulting debris. Coverage C pays for the increased cost to rebuild the entire structure in compliance with current building codes.
For apartment buildings, demolition costs under Coverage B can be substantial. Demolishing a multi-story concrete apartment building costs $15 to $25 per square foot, while wood-frame buildings cost $5 to $15 per square foot. A 100,000-square-foot apartment complex requiring full demolition could face $1.5 million to $2.5 million in demolition costs alone, before any rebuilding begins.
Many apartment owners purchase ordinance or law coverage with a single combined limit for all three coverages. This approach can be problematic because a large demolition cost (Coverage B) can exhaust the shared limit and leave insufficient funds for the increased construction costs (Coverage C). A better approach is to purchase separate limits for each coverage, or at minimum ensure the combined limit is adequate for the worst-case scenario where all three coverages are triggered simultaneously.
Fannie Mae's Multifamily Selling and Servicing Guide (Part III, Chapter 6) requires ordinance or law coverage for DUS loans, though it does not specify minimum limits for each sub-coverage. Owners should work with their broker to model the demolition and rebuilding costs under their local building code to set appropriate limits.
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Related Questions
What types of insurance does an apartment building owner need?
Apartment owners typically need commercial property, general liability, loss of rents, umbrella, and workers compensation coverage at minimum.
How much does apartment building insurance cost?
Apartment building insurance typically costs $500 to $3,000 per unit annually, depending on the property's size, location, age, and coverage needs.
Do I need flood insurance for my apartment building?
If your property is in a FEMA-designated flood zone, your lender almost certainly requires it. Even outside flood zones, flood coverage is worth considering.
What is loss of rents coverage and how does it work?
Loss of rents coverage replaces rental income lost when units become uninhabitable due to a covered property damage event, such as a fire or major storm.
What is the difference between replacement cost and actual cash value?
Replacement cost pays to rebuild at current prices without deducting for depreciation, while actual cash value deducts depreciation from the payout.