The Occupational Safety and Health Act was signed into law in 1970 by President Nixon, and the Occupational Safety and Health Administration (OSHA) was simultaneously created to implement, administer, and enforce its requirements. OSHA’s mission is to “assure safe and healthy working conditions for working men and women by setting and enforcing standards and by providing training, outreach, education and assistance.” Every single contractor in the United States is required to provide a safe work environment for its construction workers. Compliance with OSHA standards is mandated by federal law and is not optional. Over the years, it has become obvious that many insurance companies are not including the necessary cost of OHSA compliance within their Xactimate estimates. Contractors, public adjusters, and insurance appraisers have shown me countless estimates from insurance companies that omit any costs for OSHA compliance.
The cost of compliance varies depending on the type of job to be performed, but OSHA standards are applicable and enforceable on both residential and commercial projects. There are OSHA standards that must be followed for fire and water remediation, as well as roof replacements and siding repairs. Many insurance company adjusters do not believe that OSHA standards apply to residential roof replacements. This is a very common misconception, but here is a link from OSHA that explains the guidelines for residential roofing and fall protection – – OSHA Fact Sheet – Fall Protection in Residential Construction.
In my experience. I would estimate that 95% of the Xactimate estimates that I have seen written by insurance company adjusters do not include any of the necessary costs for OSHA compliance. Of the 5% that I do see that have these costs added, most of those incorrectly apply the costs of OSHA compliance under the “Ordinance or Law” section of the policy. I commend the adjusters and appraisers who strive to do the right thing and my hat is off to them for including these costs into their estimate; however, OSHA costs must be included within the ACV settlement and it is inappropriate to withhold these costs as “Paid When Incurred” items. Costs of compliance with an “ordinance or law,” also commonly referred to as “code upgrades,” are excluded by almost every standard form insurance policy unless the policyholder has paid an additional premium to purchase “ordinance and law” coverage. Ordinance and Law coverage is available to provide additional coverage when a law or ordinance regulates the materials, demolition, or construction to a property after a covered loss. For example, drip edge is required to be installed on the eaves of roofs in every jurisdiction within the state of Tennessee. If a roof requires replacement and it does not currently have drip edge installed, the building code will require drip edge be installed during the new roof replacement. The cost associated with the drip edge will fall under the ordinance or law coverage provided by the policy and some of these policies only pay this cost on an incurred basis, meaning it is not paid with the initial ACV payment. For reference, a standard residential ordinance or law provision is below:
Ordinance or Law
- You may use up to 10% of the limit of liability that applies to COVERAGE A, you may use up to 10% of the limit of liability that applies to Building Additions and Alterations for the increased costs you incur due to the enforcement of any ordinance or law which requires or regulates:
(1) The construction, demolition, remodeling, renovation or repair of that part of a covered building or other structure damaged by a PERIL INSURED AGAINST;
(2) The demolition and reconstruction of the undamaged part of a covered building or other structure, when that building or other structure must be totally demolished because of damage by a PERIL INSURED AGAINST to another part of that covered building or other structure; or
(3) The remodeling, removal or replacement of the portion of the undamaged part of a covered building or other structure necessary to complete the remodeling, repair or replacement of that part of the covered building or other structure damaged by a PERIL INSURED AGAINST.
- You may use all or part of this ordinance or law coverage to pay for the increased costs you incur to remove debris resulting from the construction, demolition, remodeling, renovation, repair or replacement of property as stated in a. above.
This coverage is additional insurance.
With this provision, the homeowner can use up to 10% of his or her dwelling limit to cover any increased costs or demolition that is required to comply with an ordinance or law that regulate the construction or demolition of the building. This is not the same thing as compliance with OSHA standards. When a property was built, it must be assumed that the building was built in a safe manner, and estimating and paying OSHA costs on an ACV basis is merely returning the property back to the condition it was in at the time of the loss. OSHA compliance does not increase the value of the property or provide any betterment. As a result, depreciation should not be applied to costs of OSHA compliance. In the same way, holding back these costs as “Paid When Incurred” would be a misapplication of the policy provisions.
Commercial policies are much more complex when it comes to Ordinance or Law coverage and typically have three distinct coverages within the Ordinance or Law section. Like residential policies, these coverages are not usually automatic, and an additional premium must be made to have this type of “Code Upgrade” coverage. An example of a commercial Ordinance or Law provision is shown below:
Coverage A – Undamaged Portion of the Building. When an Ordinance or Law requires an Insured to tear down the undamaged portion of a building, this coverage provides protection for the value of the undamaged portion of the building.
Coverage B – Demolition. When an Ordinance or Law requires an Insured to tear down the undamaged portion of a building, this coverage pays for the cost to demolish and haul away debris from the undamaged portion of the building.
Coverage C – Increased Costs of Construction. When an Ordinance or Law requires modifications in how a building must be repaired or reconstructed, this coverage provides protection for the increased costs of construction associated with repairing or rebuilding the structure to the code existing at the time of the loss. Coverage usually applies to both the damaged and undamaged portions of the building.
Again, just like residential policies, these additional commercial property coverages have nothing to do with the minimum standards set forth by the federal government to keep workers safe. Each of the above coverages are intended to remove, build, or upgrade covered property after a loss due to the enforcement of local code requirements. I do not believe that any insurance company or their adjusters intentionally want to put workers or the general public in any type of danger; however, by not applying the minimum safety standards to their repair estimates, they essentially are doing just that. The key points to know are these:
- OSHA standards must be followed on every single reconstruction project, large or small, residential or commercial.
- OSHA standards are not suggestions, they are federally mandated.
- The usual and customary costs for OSHA compliance must be paid on an ACV basis for claim settlement purposes.
- OSHA Standards are not code upgrades and they do not fall within the Ordinance or Law coverage provisions.
OSHA Standards should never be coded as “Paid When Incurred.” By withholding the necessary costs of OSHA compliance, this is no different than depreciating or withholding the cost of labor to install or replace a damaged item, which the Tennessee Supreme Court ruled last year to be unlawful. A link to my blog about the depreciation of labor can be found here.
Do not let insurance adjusters tell you otherwise, the cost for OSHA compliance is not already built into Xactimate line item estimate pricing. There are specific line item entries available to estimators within Xactimate that must be added to the estimate. Also, remember that the premiums that most policyholders pay are based on a replacement cost valuation basis, meaning the cost of replacing the damaged property for today’s reconstruction costs. Because policyholders are already paying a premium for OSHA compliance, they should be compensated for these costs on any loss where OSHA standards apply to the repair or replacement of damaged property.