The Elephant in the Room

In the July issue of this Newsletter we told you about the ITV Epidemic running rampant regarding under insurance of buildings on current insurance policies. So let us address another issue which contributes to this. The Principle of Substitution.

It wasn’t until the nineties that the issue of the “Principle of Substitution” entered the picture to any degree. This is when obsolescence really became a factor in replacing existing  building products, or with respect to installation practices. Prior to the 90’s, products and components were readily available off the shelf and there was very little change in how these products were installed.

Due to the demise of home grown production and the introduction of “free trade” North America lost its manufacturing plants in both Canada and the U.S. Within a decade everything seemed to come from China or another country outside of this continent.

A little known factor of an insurance policy is that, if a product or procedure is obsolete, then the “Principle of Substitution” comes into play. The clause requires, if the products or practices have become obsolete, that materials or practices of like kind or quality must be substituted for the original. If like kind or quality is not available, then replacement has to be the next higher quality.  Originally the purpose was that, if like kind and quality of a part was not available to repair a component, a compatible part of higher quality  would be substituted so that the whole component would not have to be changed. It wasn’t long, however, until this practice could not be implemented because compatible parts (whether of higher quality or not) were no longer available. The whole component then had to be replaced rather than being repaired. In fact, today some components are deemed to be obsolete before they are even purchased or used in a building. An example of this would be a light fixture, produced in great volumes, manufactured very cheaply, and sold at a very low price. The fixture would typically be used by spec or tract type builders to keep the construction costs within budget. Today the issue is not one component rather a couple of thousand components in a home. The difference in repair costs sure adds up. A “Reproduction Cost Value, New” of the residence could be 5% or higher than the actual “Replacement Cost Value, New” before the home is even sold. And this does not just apply to homes, it applies to all types of buildings. But that is not all.


In a nutshell these Building Code changes apply to the following areas listed below. These changes have a weighted average effect on the increase of the “Reproduction Cost, New” value (ITV) of 8% for Agriculture, Commercial, Industrial, & Institutional Buildings. The weighted average increase for Residential Buildings is 20%.  As old applications/practices become obsolete and as products disappear from the shelves without being replenished, these cost increases will be absorbed into the “Principle of Substitution”.

  • Termite & Decay Protection
  • Windows, Doors, Skylights
  • Stairs, Ramps, Landings, Handrails and Guards in Garages
  • Egress Windows & Doors for Bedrooms
  • Life Safety & Fire Protection Systems
  • Distance to Fire Halls
  • Glazed opening in building to Exposed Peril Source
  • Distance between building to building soffits
  • Location of Smoke Alarms
  • Gases permeable subfloors
  • Foundation Wall thickness and required Lateral Support
  • Air Leakage in Masonry Walls
  • Air Barrier in Floors
  • Make up Air for Exhaust Fans (Ventilation)
  • Hydronic Heating Systems
  • Application to the classification of a Building by Occupancy
  • Occupancy loads
  • Hold open Devises
  • Fire Separation & Rating
  • Fire Stops
  • Fire Blocks
  • Concealed Spaces
  • Spacing of Unprotected Openings
  • Combustible Projections to exposed Buildings
  • Construction of Walls to
  • Exposed Neighbouring Buildings
  • Protection of Openable Windows
  • Exit Signs
  • Polyethylene/Aluminum/ Polyethylene Composite Pipe & Fittings
  • Water Temperature Controls
  • Connections to Sanitary Drainage Systems
  • Plumbing or Wet Fixture Hydraulic Loads and/or Outlet Pipes
  • Hydraulic Loads from Roofs or Paved Surfaces
  • Vent Stacks
  • Service Water Heaters
  • Service Pipe sizes to Water Heaters
  • Water Velocity in Fixtures and Piping
  • Combustible Pipes penetrating a Fire Separation

The banking industry, so intent on getting into the insurance business, has purchased a good majority of insurance organizations since the Insurance Act changed. Maybe this is their opportunity to reduce claims costs by bringing manufacturing back to North America. The banks could do this by financing local manufacturers, making quality products readily available to repair and/or replace damaged or worn out components of buildings.
This approach by the banking industry could reduce the cost of claims, create new jobs, and grow our own economy, but that would be just too simple. Just sayin’…