How Much Debris Removal Coverage Do I Need?

In the event of partial losses, the limit of insurance is usually adequate to include the cost of debris removal. However, in some cases, the limit might not be adequate or the commercial property form’s debris removal sublimit might restrict coverage. That begs the question, “How much debris removal coverage do I need?” For this article, we polled the VU faculty, some experienced agents, and a group of risk managers to get their thoughts.

Question 1

“For Commercial Property, are there any guidelines or rules of thumb on the correct amount of additional debris removal coverage an account should have?”

Question 2

“A question came up in a class I was teaching last night about debris removal. I told the class that I always recommend increasing the $10,000 additional coverage for debris removal that ISO provides to avoid two dangers: (1) The 25% of loss additional coverage may not be enough if a small direct loss triggers a very large debris removal expense, and (2) a total loss may exhaust the limits for a one-location policy, leaving only the $10,000 for debris removal. One of the students asked if there is any rule-of-thumb to use in setting the increased debris removal limit. Anyone have an idea?”

There is no hard and fast rule about how much debris removal coverage is needed…I know this is a tiresome response, but every insured is, in fact, unique. The amount of coverage needed will depend on the type of building (including size, materials, contents, etc.), nature of operations, location, and so forth. I recall one loss in particular where the direct damage was in the range of a quarter of a million dollars; however, due to the remote nature and location of the facility, the debris removal expenses approached a million dollars.

This issue was posed to the VU faculty and their comments are below. In addition, this issue was addressed not long ago in an email list called RiskMail (see details below on how you can subscribe for free). While the comments below may imply they are all from the VU faculty, several in fact are from agents, risk managers and other from the RiskMail list.

Response 2
If the policy isn’t a blanket agreement or insures a single structure, a debris removal limits decision is in order on every policy. Many policies provide $2,500, $5,000, or $10,000 or more debris removal limits in addition to the policy limit.

Fire debris in particular, and many other types of debris in general, must be deposited in a landfill. Demolition, haulage and landfill tipping fees can be significant.

The 25% allowance in the property policy is usually adequate for partial losses or under a blanket policy where the policy limit isn’t reached. In the event of a total loss, the situation is entirely different. The $10,000 or so additional limit for debris removal can leave the insured with an enormous bill that will come out of the insured’s resources.

There are times when the 25% allowance is inadequate as well. Property insured under a Functional Replacement Cost form, an unusually stout structure with increased demolition expenses, and heavy industrial facilities are examples. Another example is a building in downtown urban areas. Demolition may be pushed into nighttime or weekend work schedules. Heavy traffic and proximity to other buildings may materially increase the cost. In some cities, organized crime allegedly controls demolition and hauling…there is no negotiation over price. I have seen urban demolition and debris removal run 40% of the damage. This can quickly become a six- or seven-figure sum that is uninsured.

Response 3
I use the following formula developed by myself and a fellow architect friend:

• For every 6000 sq. ft. of solid brick construction, it takes $70,000 to haul it away.

• For every 6000 sq. ft. of steel construction, it takes $60,000 to haul it away.

• For every 6000 sq. ft. of frame construction, it takes $50,000 to haul it away.

These costs are about 60% dump fees and 40% labor/trucking.

If you have a good architect, you can send him a photo. Just ask what he thinks it would cost to haul the entire building away. It doesn’t take long to exceed the limits of most standard policies.

Response4
I haven’t seen a rule of thumb, however, it is another excellent example of how needlessly confusing and irrelevant property forms have become. Why can’t one simply buy a specific limit of coverage without having to go through all these silly gyrations? What policyholder can afford to wait for payment until the E&O litigation is finalized? I hope you don’t have to explain to your class how to determine how much business interruption and extra expense coverage to buy. Especially when the underwriter wants it on a per-location basis and none are individual profit centers, and neither the insurer’s underwriters nor its crack claims adjusters can explain the calculation or coverage. But there are penalties if the policy holder doesn’t get it right. I digress.

Response 5
When looking at the appropriate debris removal limit, you first have to determine what is covered under debris removal on the policy. Some carriers include on-site pollution clean-up in the debris removal limit – other carriers have a separate on-site pollution clean-up additional coverage limit. We store chemicals, petroleum products, fertilizers, etc., so that becomes a big issue when deciding on a limit.

What we do is purchase as high a limit for on-site pollution clean-up that the property carrier will write. This is usually determined by the carrier’s reinsurance treaty. Our carrier lists separate limits for pollution clean-up and debris removal. To decide on the debris removal limit, I sought advice from our on-staff engineers. I used our property with the highest PML and asked them what it would take to remove all the debris and not to take into consideration any pollution clean-up.

They are very knowledgeable about the costs charged by contractors, as well as landfills, and provided me with an estimate. We used this to select a limit. It would be hard to use a rule-of-thumb measurement because the debris removal costs will depend on the construction of the property. If you have a frame structure, the debris removal limit will be much less than a structure with concrete and steel. I prefer to go to an expert on the subject and take their recommendation rather than using a rule-of-thumb measurement or my nonexpert-educated guess.

Response 6

She makes a great point regarding separate limits for pollution cleanup and “debris” removal. I had the contents of a chemical storage shed (an old containerized cargo shipping container) catch on fire one night on one of our ranches several years back. Because of the contents of ONE BAG of a pesticide (we’re talking ONE POUND here folks), we had to place the entire remains of the shed/shipping container, the contents, and excavate the soil eight feet down and surrounding the area, then ship it to Texas or Louisiana in sealed, impervious dumpsters. When it got there, guess what? They burned it again and put it in a landfill. (Thought we’d already done that.)

The cost was over $75,000. 25% of loss for debris removal (or $10,000 limits) would not have begun to touch this. Check what is stored in your closets or garages before you decide that $10,000 is enough.