Why You Need Building Ordinance Coverage
Building Ordinance insurance covers losses your business incurs due to the enforcement of building codes. This coverage is important since building codes can significantly increase the cost of repairing or replacing a damaged building. These increased costs aren't covered under a typical commercial property policy.
Purpose of Building Codes
Building codes or ordinances set minimum standards that must be met when structures are built or reconstructed. Their purpose is to protect the health and safety of building occupants. Building codes may be enacted and enforced by state and/or local governments.
Building codes vary from one location to another. Some governments enforce strict codes while others are lax. Also, perils that are common in some parts of the country are rare in others. Examples are earthquakes, hurricanes, tornadoes and floods. Governments consider such perils when developing building codes. In states prone to earthquakes, codes may require concrete structures to be reinforced with steel. Similarly, codes in flood-prone areas may require buildings to be elevated above ground level.
New and Existing Buildings
Building codes are primarily directed at new construction. Yet, they may also apply when existing structures are renovated, altered, reconstructed or used in a different way. Some codes may require a building that is only partially damaged to be demolished and reconstructed rather than repaired. A building may require demolition and reconstruction if the damaged portion is worth 50% or more of the building's value. Codes can affect the size, design, height, usage and location of a structure. They may also determine the building materials that may be used.
Building codes change frequently. Codes that existed when a structure was built may be outdated when a loss occurs. To meet current codes, a damaged building undergoing repair may require expensive materials. Some structures may need to be reconfigured. Thus, building codes can significantly increase the cost of the repairs or renovations.
Ordinance or Law Exclusion
Most property policies contain an Ordinance or Law exclusion similar to one found in the ISO form. This exclusion precludes any loss caused by the enforcement of any law or ordinance that regulates the construction, use or repair of any property. It also excludes any law that requires the tearing down of any property, including the cost of removing its debris.
The Ordinance or Law exclusion may apply to a loss caused by the enforcement of a building code even if a building has not been damaged. For example, Clarence owns a movie theater located in the town of Happyville. The Happyville Building Department has determined that the theater is old and in danger of collapse. A local ordinance requires Clarence to demolish the theater. Because of the Ordinance or Law exclusion in Clarence's property policy, his insurer will not pay the cost of demolishing the building or removing its debris.
Building Ordinance Coverage
Ordinance or Law insurance consists of the three coverages described below. They are designated A, B and C. You may purchase any or all of them.
- Coverage A: Loss of Undamaged Portion This coverage applies when only one portion of a building has been damaged, but the code requires demolition of the entire structure. It covers the loss in value of the undamaged portion of the building.
- Coverage B: Demolition Costs Covers the cost to demolish and clear the site of the undamaged parts of the building.
- Coverage C: Increased Cost of Construction Covers the cost to repair or reconstruct damaged portions of the building. It also covers the costs to reconstruct or remodel undamaged portions of that building, whether or not demolition is required.
Coverage A is included in the limit of insurance that applies to the building. For Coverages B and C, you can purchase a separate limit for each coverage, or a combined limit that applies to both coverages.
The Ordinance or Law endorsement applies only to loss or damage by a covered peril. If a loss is caused partly by a covered peril and partly by a peril that is not covered, your insurer will pay only the portion of the loss caused by the covered peril. For example, suppose your building incurs $50,000 in damage by a combination of wind (a covered peril) and flood (an excluded peril). If wind has caused 50% of the damage, your insurer will pay only 50% of the loss. It will not cover the remaining 50% of the damage that was caused by flood because flood is an excluded peril.
The Building Ordinance endorsement contains some exclusions. First, none of the coverages applies to repair or replacement of property due to contamination by fungus, wet or dry rot, bacteria, or pollutants. Also excluded are costs imposed by any law requiring you to clean up any of these substances. Thirdly, Coverage C applies only if the building is used for similar occupancy (purpose) as prior to the loss unless that type of occupancy is barred by building codes.
Coverage Included in the Policy
Some property policies contain the Ordinance or Law exclusion cited above but add back some coverage as a “coverage extension.” For example, newer versions (2007 and later) of the ISO Building and Personal Property Coverage Form cover Increased Cost of Construction. The limit that applies is the lesser of $10,000 or 5% of the building limit.
A $10,000 limit can be used up very quickly. Moreover, the ISO form does not cover loss of any undamaged portion of the building or its demolition (Coverages A and B above). If your policy includes Building Ordinance coverage, make sure you understand what is actually included. If you find the language confusing, ask your agent or broker to decipher it for you.