Property Insurance Coverage Problem – Debris Removal

Property insurance is designed to pay for the reconstruction of your building or the replacement of your property after a loss. Before you can rebuild from a fire or wind damage, you have to clean up the mess. The charred remains of the building must be disposed of before new construction can begin. A little-discussed section of your property insurance provides limited insurance for “Debris Removal.”

Not long ago, removing the rubble from a fire was a matter of using a backhoe and dump trucks to haul the stuff to a landfill. Environmental laws, however, changed the dynamics of disposal. What if asbestos tile insulation or floor coverings were in the building? Were chemicals stored in the structure? Did manufacturing materials change in the heat of the fire into “hazardous waste”?

Most property insurance policies include payments for debris removal as an “additional coverage.” The insurer promises to “pay your expenses to remove debris of covered property caused by or resulting from a covered cause of loss that occurs during the policy period.”

The most commonly used property insurance policy provides for a maximum amount of coverage equal to 25% of the amount paid for the direct physical loss, plus 25% of the amount of the deductible. For example, the amount of the debris removal expense that would be available for a paid loss of $50,000 where a $1,000 deductible was used would be $12,750 (25% of $51,000).

If this amount is insufficient to cover the cost of debris removal, or the sum of the amount of direct physical loss plus debris removal exceeds the applicable limit of insurance, an additional $10,000 per occurrence is available to cover debris removal under the “limits of insurance” section of the policy.

Let’s look at a claim to illustrate the issue:

Replacement Cost of Building: $350,000
Amount of insurance Purchased: $350,000
Deductible: $ 1,000
Cost of Debris Removal $ 25,000

The policy allows 25% of the direct loss. However, as the limit of insurance is used up in the payment of the replacement of the building, nothing is left to pay for debris removal. The additional coverage provision will provide $10,000 of coverage leaving $15,000 uninsured.

Additional amounts of insurance for debris removal expense can be purchased. In many cases, during policy negotiations, additional debris removal protection can be added at no cost to the insurance buyer. Many insurance companies have coverage extension endorsements that increase the coverage. Sometimes all you have to do is ask.

Other issues to consider include costs associated with laws and ordinances that could impact the rebuilding of the structure in question. Many municipalities have zoning ordinances that do not allow for the reconstruction of buildings that are “nonconforming uses.” If such is the case, issues of demolition of undamaged sections of buildings should be considered. A higher cost of construction in another location is another matter to include in the decision of how much coverage to buy.

Buying property insurance is more than setting the amount of coverage. A detailed analysis is necessary if the job is to be done right.