Downzoning: Ask these questions

Does the property policy cover downzoning? Is coverage to policy limit? Is there a time limitation on the period of liability? What about business interruption?

A 15-story building suffers a total loss. Since the original construction of the building, new zoning regulations have been implemented stating that no new building can be higher than 10 stories. Where does that leave the building owner? That depends on their insurance policy. Downzoning coverage varies widely from carrier to carrier.

Many carriers provide no coverage for downzoning in their property policies. Consequently, businesses may need to secure a separate policy to handle this exposure. Some carriers offer limited downzoning coverage within their property policies and/or periods of liability are often limited to a specified amount of time.

If you are insured by AFM, no matter what your occupancy, downzoning coverage is included to the policy limit. This coverage comes into play when, as a direct result of the enforcement of a law ordinance, the insured is prohibited from repairing, replacing or rebuilding to the same height, floor area, number of units, configuration, occupancy or operating capacity.

In the example above, the proVision policy would provide for 10 stories of repair and replacement coverage. Since the top five floors can't be rebuilt, AFM downzoning coverage would provide the insured with the amount that would have been spent to rebuild or replace the damaged property to the original building height, without having to use the capital expenditure provision of the valuation clause.

Calculating the Real Property loss

  • Estimate to replace 15 stories: US$100 million. Estimated replacement cost, exclusive of code improvements
  • Actual cost to replace 10 stories: US$75 million. Downzoned replacement cost value, exclusive of code improvements
  • Actual cash value of five stories not built: US$5 million. These floors are not replaced/rebuilt
  • AFM downzoning coverage pays the difference between the actual cash value and the cost to replace the property that the code would not allow to be rebuilt (in this example, US$20 million)

The AFM policy also would respond to the business interruption loss in the example above by applying a period of liability to the amount of time that it would have taken to replace all 15 stories, even though only 10 stories can be replaced due to zoning regulations.

AFM downzoning is included within the Demolition and Increased Cost of Construction coverage in our core form, so all our clients benefit from this coverage at all their insured locations.

Note: This information is provided for purposes of illustration only, and does not constitute, replace, or supplement actual policy language. Each loss must be examined with reference to its own particular facts and circumstances, in light of applicable policy language. The liability of AFM is limited to that contained in its insurance policies.