How building codes trip insurers up, and what the future holds


It is all too easy for insurers to ignore building codes when underwriting property risks. But complying with the ever-shifting codes often trips insurers up, and can even cost them more than repairing physical damage to buildings.

So what kind of pitfalls can building codes present insurers, and how will these codes change in the future?

One problem is simply keeping abreast of the pace of code changes across the world. Each country has its own codes, and in large nations like the US how building codes are interpreted can vary on a state and local level. While some countries update their codes at set intervals, there are also intense periods of code changes whenever a natural catastrophe hits a region and causes widespread property damage.

“It is very, very difficult to stay in sync with the evolution of code,” says Lenny Alexander, vice president of structural engineers Thornton Tomasetti. “You can have one event where a certain set of rules apply. In another state, different rules apply.”

Building code headaches for insurers tend to occur at the claims stage. “The issue of code upgrade only starts to come about slowly through the adjustment process, as a sub issue,” says Thornton Tomasetti senior vice-president Bruce Arita.

Claimants and insurers’ first reaction to a loss is to seek to restore a damaged property to its original condition, but code changes can hamper this. “Sometimes the building cannot be put back the way it was because the code has changed, and we are told that by the jurisdiction,” Arita says. Sorting this out from scratch, when the building has already been damaged, is time consuming and can prove very costly, he adds.

There is also an issue around how much money is allowed in insurance policy wordings for the cost of complying with building code upgrades. This ties into a wider issue – the extent to which underwriters respect and incorporate building codes.

Arita gives the example of a church insurance policy that only permitted $10,000 for the cost of code upgrade work. The cost ended up being six figures, he says. But other policies can have the opposite problem, by granting an unlimited ceiling on code upgrade costs, leading to snowballing expenses.

“How those two files have those kind of limits, one unlimited, one very small, is a mystery to me,” he says.

So what does the future of building codes hold? A spokesman for The International Code Council, which updates and sets codes, says: “While we can’t predict future changes to the international codes, we can expect changes will be related to advances in building science and technology, and lessons learned from the past.”

Arita thinks that climate change will shape the future of codes. “In the next 50 to 75 years you will see a lot more focus on weather-related changes, with global climate change and sea level rises,” he says.

Codes are also likely to start pre-empting future building needs, rather than relying on historic events, Arita adds: “I think codes will move in the direction of forecasting issues, modelling.”

Finally, the future will also see underwriters taking building codes into account more, Arita says: “The alignment of underwriting and codes has got to be stronger, so that there is not a disconnect from what is underwritten from year to year. If you are underwriting something and you don’t know what the codes are going to be next year, I think that is something that needs to be corrected, or at least strengthened.”