Insuring Older Buildings: A Look at Property and Liability Risks

Insuring older buildings requires a different approach from providing coverage for modern, newer structures. Older buildings come with unique property exposures, including non-compliance with current local building codes and valuation issues. And, because of their age, they also come with greater liability risks than newer buildings.

4 Property Insurance Considerations for Older Buildings

Several unique considerations and risks are associated with the age and construction of older structures, according to Wes Robinson, president of RPS National Property. Here are four critical factors he advises agents and insureds remember when insuring an older building:

1. Older Buildings Are Likely Not Up to Code

Older buildings, unless they've recently undergone renovations and upgrades, don't comply with current modern building codes, zoning regulations or safety standards. If a property loss occurs, bringing a building up to code during a rebuild will come into play.

"For example, accessibility standards, electrical and plumbing upgrades and life safety codes — such as fire alarms, sprinklers, emergency exits and fire-resistant materials — are just a few of the issues that arise following a property damage loss," explains Robinson. "It's important that Ordinance or Law coverage be included within an insured's Property insurance program to help pay the costs involved in rebuilding or repairing a building in compliance with current federal, state, and local codes."

Ordinance or Law coverage has three main insurance components:

• Coverage A: Loss to Undamaged Portion. If modern code compliance requires demolishing the undamaged portion of the building, Coverage A pays for the resulting loss to this section of the existing building.
• Coverage B: Demolition Costs. This component covers the expenses to demolish the undamaged portion of the building, including the costs to haul away debris.
• Coverage C: Increased Cost of Construction. When additional costs are incurred because of the enforcement of an ordinance or law following a covered property loss, Coverage C typically pays for mandatory code upgrades. This coverage includes repairs or additions that are required by ordinances or laws that weren't present in the structure prior to the loss. For example, if the current code requires handicap ramps or other Americans with Disabilities Act (ADA)-compliant facilities or a new sprinkler system, this coverage would help pay for these expenses.

The additional premium for Ordinance or Law coverage is well worth it for insureds who own an older building.

2. Loss Expectancy Is Greater for Older Buildings

Unsurprisingly, older buildings = higher loss expectancy.

"Older roofs can fail more easily, old pipes can break, electrical connections can start a fire," says Robinson. "For these reasons, rates and deductibles are higher on older structures. It's important to know what upgrades have been made to the buildings over the years to be able to discuss them with the underwriter."

In addition, insurance carriers may require evidence of regular maintenance to ensure that the building remains in good condition and to mitigate the risk of preventable damage.

3. Older Buildings May Have Historical or Architectural Value

Buildings with historical and architectural value can be difficult to insure and costly to repair.

"Rebuilding or repairing older buildings can be more expensive than modern structures due to the need to replicate unique architectural features, use specialized materials and employ skilled artisans. Insurance coverage must take these higher replacement costs into account," says Robinson.

"Stated value or reproduction costs are options, but additional consideration needs to be given if specialized restoration is needed or extra time is required to import certain materials. Also, construction permits on these types of structures can be lengthy."

4. Having an Appropriate Valuation Method Is Key

Determining the correct valuation for an older building can be challenging. Options include agreed value, replacement cost or market value.

"Selecting the appropriate valuation method ensures your insured will be adequately covered in case of a property loss," explains Robinson.

"Valuation is a front-and-center point for all types of buildings — new and old. Underwriters are putting additional emphasis on getting adequate valuations for new and renewal business as a result of rising inflation and the increased cost of construction."

Factors influencing property values for older buildings include:

• Direct expenses, such as materials and labor
• Indirect expenses, such as consulting fees, engineering services and other expenses not directly associated with rebuilding
• Additional construction costs to upgrade outdated building materials and equipment
• Costs to make certain modifications to comply with modern building codes
• Property accessibility — properties on steep slopes or adjacent to neighboring properties may require putting safety measures in place during demolition and rebuilding to ensure accessibility
• Unique features that necessitate specialized construction work, which will increase rebuilding costs after a loss

A thorough, 360-degree look into your insured's property is critical so that an underwriter has all the information needed to evaluate the risk.

Liability Risks for Older Buildings

So now the property itself is protected, but what about liability issues? They're everywhere in older buildings. Here are five big concerns, according to RPS's Ashby Moore and Kevin Burns.

1. Structural Issues Abound in Older Buildings

The devastating 2021 collapse of the Champlain Towers South building in Surfside, Florida, resulted from failure to address critical engineering findings over the course of several years. A preliminary investigation found that the condominium's concrete columns and pool deck were constructed improperly and didn't meet building codes.

According to an NPR news segment, the way in which the concrete was cast left it permeable to water, corroding much of its steel reinforcement. "The rebar was also placed improperly into the cast concrete slabs of the pool deck, leaving those sections weaker than required. Over the building's 40 years, heavy items including large planters containing palm trees were placed on vulnerable sections of the weakened pool deck."*

Engineers, in their structural reports, requested the Surfside Community Association take corrective actions to fix the corrosive columns. Tragically, nothing was done, and 98 people perished in the collapse of the building. The surviving unit owners reached a $1 billion liability settlement.

Although this example of what could occur if structural issues aren't addressed is extreme, it demonstrates the liability risks in older buildings. To insure older buildings — particularly in Florida — carriers request 40-year certifications in which a licensed professional engineer undertakes detailed structural and electrical safety inspections on a building every 40 years to examine any potential safety or structural risks. The engineer's report documents any failure that poses an urgent hazard to the safety of a building's occupants.

In addition to these certifications, carriers review a community association's board minutes to determine whether it implemented corrective actions in response to the engineering reports.

Many of these older habitational risks are in Florida, the toughest area to insure, in addition to New York, with increasing liability and property rates.

2. Older Buildings Often Have Inadequate Maintenance

Older buildings might not be maintained as they should be, leading to safety hazards. Failure to address maintenance issues promptly and adequately can result in liability for injuries or damages caused by negligence.

For example, a visitor to an older apartment or office building could easily slip and fall if communal pathways, sidewalks and stairwells are not maintained. Many older properties have inside stairwells that increase the owner's liability exposure if not repaired. Older buildings with roofs that haven't been replaced also face liability exposures.

3. Security and Safety Measures Aren't Always Up to Date

Older buildings may have outdated security measures, making them more susceptible to break-ins, theft or other criminal activities. Data show that buildings in low-market-value areas tend to have higher exposure for assault-and-battery incidents. Garden-style apartment buildings and motels have a higher security risk, because there's no exterior entrance or lobby.

4. Older Buildings Have Outdated Electrical and Plumbing Systems

Outdated electrical and plumbing systems in older buildings can be a fire hazard or cause water damage. These systems might not meet current safety standards or be equipped to handle modern technology and usage demands, posing liability risks to occupants in addition to property damage.

For example, if an older building is wired with zebra circuit breakers that haven't been updated and a fire breaks out killing a tenant, the property owner can be sued for negligence.

5. Asbestos and Lead Paint... No Thanks

Asbestos and lead-based paint, used frequently in construction before their health concerns were recognized, might be found in older structures. Exposure to these materials can cause major health concerns, resulting in legal liabilities for property owners.

Recommendations for Insureds with Older Buildings

When a client comes to you with an older building to insure, here's what to do.

Speak to them about the need for a third party to perform a property inspection to determine what security, safety and other hazards exist. Based on the inspection's findings, recommend your clients take immediate action to address the issues. Doing so will help prevent and mitigate liability losses and demonstrate to insurers that they're proactive and taking safety and security practices seriously. Clients will then be in a better position to get coverage and a better rate.

In addition to the property inspection, insureds should post hazard warning signs in garages, pathways, stairwells and other common areas, and ensure that these areas are well maintained.