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Current Articles 2005 - February
"Same Site" Requirements
When a settlement is required on a replacement cost basis as opposed to actual
cash value the commercial property policy will be endorsed with a Replacement Cost
endorsement. One of the requirements to be able to effect a settlement on a replacement
cost basis, (without deduction for depreciation), is that replacement shall be on the same
site or on an adjacent site.” The reason for this requirement is to try to overcome a
possible moral hazard. If a client has a building in a deteriorating neighbourhood and
with its value diminishing, the client may attempt to “arrange” for a total loss to the
building so that he could rebuild in a better end of town. However, if he does not rebuild
on the same site, the same site clause would not permit settlement on a replacement cost
but would apply depreciation, which could be considerable. For financially sound and well-established clients it is possible to negotiate with the underwriter and have the “same site clause” deleted. This is usually done without additional premium and is strictly an underwriting decision. I can recall a client that was a metal worker located in an area that had been rezoned for use as residential or as a parking lot. Obviously, he could not rebuild on the site. The business was well established for over 50 years and was profitable and therefore I had no difficulty in removing the same site clause.
In several cases, which I have been involved, the broker had correctly deleted the same site clause from the replacement cost endorsement. But the Blanket Building By-Laws endorsement also states: the insurer shall not be liable under this endorsement for losses occasioned by the enforcement of any by-law, regulation, ordinance or law which prohibits an insured from rebuilding or repairing on the same site or on an adjacent site… The message here is loud and clear! If you are going to delete the same site requirement from the Replacement Cost Clause you better do the same from the By-Law endorsement. In a couple of E & O defenses involving the lack of the same site deletion from the By-law endorsement, the plaintiff’s lawyer posed the question: “Mr. Broker you deleted the same site requirement from Replacement Coverage. Why did you not delete the same clause from the By-Law Clause? You would have no defense to that question. In one such case the additional by-law expense was close to $150,000 and picked up by the broker’s E & O.
Homeowner’s policies also have a same site requirement applicable to the Described Building and Detached Private Structures. In the Basis of Claims Payment – Clause B, (formerly called the Optional Loss Settlement Clause), one of the requirements is that replacement must be on the same location. The same rationale for this clause exists but it is much more difficult to remove this requirement from a residential policy and is usually not as necessary. If the policy is subject to a Guaranteed Replacement Cost Clause the same site requirements also exist along with several other requirements.
Farm Buildings (other than the farm residence) MAY be subject to a “Rebuilding Clause”. If the policy is subject to a Rebuilding Clause it is usually stated on the Declaration Page. This is quite different in that it will pay 50% of the amount of loss immediately and your insured will only be paid the remaining 50% if the insured repairs, rebuild or replaces within 300 feet of its original site and within 12 months of the date of loss. If the building is NOT rebuilt the original payment of 50% will be the total amount paid.
Removing the same site requirement is a good recommendation from a broker’s perspective. But to act prudently you must remove the same site requirements from ALL endorsements or advise the client accordingly.
| James E. Bonnay, C.I.P., C.C.I.B. Insurance Consultant |
Phone 905-333-1727 Fax 905-333-0683 E-mail - jamesbonnay@cogeco.ca |
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