I was recently participating in a mediation for a client condominium association. We are pursuing a first party insurance claim for property damage discovered by the client. Due to the amount of repairs necessary for the project, the client triggered certain code upgrades required by the County and fire department. The upgrades were both unexpected and costly at just under $500,000.

Upgrades like this can be either a blessing or curse. Often, code upgrades are triggered solely by the amount of repairs taking place (if your repairs exceed a certain percentage of your building value, you may be required to perform code upgrades). Because these upgrades do not directly result from property damage, insurers will deny coverage under the body of the policy. Most policies, however, contain some form of Ordinance or Law Coverage (also known as Code Upgrade coverage). This is the good news, as you may have insurance to cover the required upgrades.

Now for the bad news. As part of the claim process, we discovered that the limit of the Code Upgrade coverage is $10,000. The estimated value of the buildings is $3.5 million. So, even though the client has coverage, it will only cover a fraction of the required costs. The adjuster indicated that $10,000 is often the limit that comes as a default on a first party property policy. It was never increased.

My advice for board members and managers is to review your current code upgrade limits and make sure you are comfortable with your risk. Code upgrade limits can range from 10%-50% of the project value. For associations or building owners who choose to ignore or keep code upgrade limits artificially low, unexpected and uncovered costs may leave you seeing red.