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Ordinance & Law Coverage – An Overview

Learn how ordinance & law coverage protects your home by covering the costs of rebuilding or repairs required to meet updated building codes after damage.
Oct 4, 2024 | 4 min read
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Ordinance & Law Coverage – An Overview
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Ordinance & Law Coverage (also known as Building Ordinance coverage) is sometimes overlooked, but it is an important coverage to consider. This guide provides a general overview to help you understand why you should consider adding this valuable coverage.

It’s important to understand Ordinance & Law coverage as it relates to the undamaged portion of a building that has experienced a loss. Standard property policies provide coverage to restore the physical structure to its pre-loss condition following a covered peril. 

However, what’s not covered is the increased cost of rebuilding, repairing, or remodeling due to the application of local, state, or federal building codes. Ordinance & Law coverage was developed to fill this gap. In addition, business income coverage typically excludes any delays caused by building ordinance enforcement, but Ordinance & Law – Increased Period of Restoration coverage can address this gap.

A Practical Understanding

When a building is constructed, it must meet the building codes in effect at that time. Over time, those codes may change, meaning that a building once in compliance could later become non-compliant. These changes may be triggered by local, state, or federal laws. A common example of federal building requirements is the Americans with Disabilities Act (ADA), which mandates accessibility features. However, local codes are often more relevant, as local jurisdictions enforce these regulations.

ABCs of Building Ordinance Coverage

Coverage A: Loss to the Undamaged Portion of a Building

This coverage applies when a covered loss triggers a building ordinance, but only part of the building is damaged. If the undamaged portion is rendered unusable or condemned due to the ordinance, the entire building may need to be demolished. This coverage indemnifies the insured for the undamaged portion, even if there was no direct damage from the covered peril.

The coverage limit is the total amount listed in the property policy, and it's important to insure the building at 100% of its replacement cost value. This coverage is subject to coinsurance when included under a standard property policy.

Coverage B: Demolition Cost

This coverage pays for the cost of demolishing the undamaged portion of a partially damaged building (while the property policy covers demolition of the damaged part). Determining an appropriate limit for this coverage depends on several factors, such as:
  • Local demolition costs
  • The amount of the undamaged portion of the building
  • Special hazards, such as asbestos

A rough estimate can be 2 to 5 times the square footage of the worst-case scenario (approximately 50% of the structure). This is often an "educated guess," as there is no fixed limit for this coverage and coinsurance does not apply.

Coverage C: Increased Costs of Construction

This covers the costs of bringing the building into compliance with current building codes. Setting limits for this coverage can be challenging, as it is excluded from standard property policies, meaning the insured may not have a true replacement cost value without it. The more informed the insured and agent are about the building’s code compliance, the better the limit determination will be. Coverage C is not subject to coinsurance.

Increased Period of Restoration

Sometimes, repairing or replacing the undamaged portion of a building can be delayed due to building codes. This coverage extends the period of restoration under business income coverage, allowing for delays caused by enforcement of building codes. 

The "period of restoration" begins after the loss and ends when the property should be repaired or replaced, but it does not account for delays due to ordinance enforcement. The Increased Period of Restoration endorsement extends business income and extra expense coverage to include this additional time.

It is important to note that this endorsement does not cover delays related to pollution cleanup or removal. When selecting this optional coverage, adjust the business income coverage limits to reflect the extended indemnity period.

What Triggers Building Ordinance Coverage?

Building Ordinance coverage is triggered if the following conditions are met:

  1. The loss is caused by a covered peril.
  2. The loss meets the "major damage" threshold defined by the jurisdiction. This refers to a point at which the local jurisdiction deems the building unsafe for repair, requiring full compliance with current codes. The threshold varies by jurisdiction, but typically falls between 50% - 60% of the building’s value.
  1. The building must be deficient in some aspect of the local building code in effect at the time of the loss.

Building Ordinance Form

It’s essential to review the Building Ordinance form, which contains exclusions, such as loss of property value and pollution-related losses.

Current Replacement Cost Value

Indemnification for the undamaged portion is limited to the stated value of the building. If the building is insured for less than 100% of the replacement cost, there could be a coinsurance penalty or insufficient funds to rebuild. Many specialty carriers do not offer blanket endorsements, so each building is insured for a specific amount.

Setting Limits

Setting limits for Coverage B: Demolition and Coverage C: Increased Cost of Construction can be complex due to many variables, such as:

  • Should these limits be sub-limits, reducing the actual amount available to rebuild?
  • Should these limits be separate from the building’s replacement cost?

Local Building Codes

Obtain as much information as possible about local building codes, as they frequently change. Older buildings are more likely to be impacted by code changes over time.

Building Characteristics

Understand the specific characteristics of the building. Special hazards or circumstances, such as asbestos or public occupancy, can increase costs.

If we can assist with these coverages, please contact us at ccis@ciramail.com.

Please note that the information provided in this article is for educational purposes only and does not constitute legal or insurance advice. The codes, coverages, and recommendations discussed may not apply to your specific association, property, or situation. Always consult with a licensed insurance agent to obtain a detailed explanation of the coverages and exclusions that are relevant to your unique circumstances.

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