Constructive Total Loss—How Settled?

One of our commercial clients, insured on a CP 00 10 04 02 with the replacement cost option, had a building insured for $350,000. A fire destroyed most of the building; two walls were left standing but the other two walls, roof, and much of the flooring has been destroyed.

Our client learned from the local building inspector that, because the building was not in compliance with the local building code prior to the loss, and because it is now more than 50 percent damaged, it will have to be razed. The insured has not decided whether to rebuild or purchase another building. In any event, the insured thinks he is entitled to the policy limits because the building cannot be repaired, and because it will cost more than $500,000 to rebuild to code. Meanwhile, the insurer says it is only responsible for the part of the building that was actually damaged. Further, the insurer says it is not liable for any more because of the ordinance or law exclusion.