Building Ordinance insurance covers losses your business incurs due to the enforcement of building codes. Such insurance is important because building codes can significantly increase the cost of repairing or replacing a damaged building. These increased costs aren't adequately 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. They help ensure that new or repaired buildings are safe, structurally sound, and resistant to natural hazards like wind and fire. Building codes are enacted and enforced by state or local governments.
Building codes vary from state to state. Some are strict while others are lax. Some communities have no building codes at all. Building codes reflect risks that are common to specific localities. For example, codes in areas prone to earthquakes may require buildings to be constructed or retrofitted so they can withstand shaking. Likewise, codes in coastal areas may require buildings to be elevated to withstand floods.
In structures like apartments, office buildings, and malls the ordinances will also set the requirements for fireproofing, occupation capacity, and soundproofing.
May Apply to Existing Buildings
While building codes focus on new construction, they may also apply to existing structures that are renovated, altered, reconstructed or used in a different way. In some cases, codes may prohibit damaged buildings from being repaired. For instance, a code may stipulate that a building must be demolished and reconstructed rather than repaired 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 dictate the types of building materials that may be used.
Building codes are revised frequently. Codes that existed when a structure was built may have changed significantly by the time 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 repairs or renovations.
Ordinance or Law Exclusion
Most property policies contain an Ordinance or Law exclusion like the one found in the standard ISO policy. The 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 applies whether or not a building has been physically damaged. For example, Clarence refurbishes an old movie theater he owns. Because the renovations are extensive, the reconstructed building must meet current codes. Clarence's property insurer won't pay any extra costs Clarence incurs to comply with those codes. Such costs are precluded by the Ordinance or Law exclusion in his policy.
Increased Cost of Construction
Many property policies include an “additional coverage ” called Increased Cost of Construction. This coverage is provided as an exception to the Ordinance or Law exclusion. It covers increased costs you incur to comply with the minimum standards of an ordinance or law when a building insured for its replacement cost is damaged by a covered peril.
The limit provided for Increased Cost of Construction coverage is low, typically the lesser of $10,000 or 5% of the building limit. This coverage is not a substitute for full Ordinance or Law Coverage (discussed below).
Ordinance or Law Coverage
Ordinance or Law coverage is available by an endorsement. It covers losses caused by building code enforcement if the building has suffered damage by a covered cause of loss, such as a fire.
Ordinance or Law insurance consists of the three coverages described below. You may purchase any or all of them.
- Coverage A: Loss of Undamaged Portion. Applies when one portion of a building has been damaged but the code requires demolition of the entire structure. 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. 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 applicable to both coverages.
The Ordinance or Law endorsement applies only to loss or damage by a covered peril. If a loss is caused by two perils, only one of which is covered, your insurer will pay the portion of the loss that's 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 restored or remodeled building is intended for similar occupancy (purpose) as the current property, unless that type of occupancy is barred by an ordinance or law.