Insurance update:
Ordinance or Law Coverage – The “Ins and Outs”

For those of you that own your own Building, you’ve all addressed how the “replacement cost limit” listed under your Property policy is calculated. However, for many of you, understanding how your limit was determined is where your Building Insurance discussion ends. Among a lengthy number of additional coverages and exclusions that should be discussed surrounding the process of insuring your Building, “Ordinance or Law” is one of the most important yet least acknowledged or understood areas of coverage.

Ordinance or Law is defined as, “coverage for loss caused by enforcement of ordinances or laws regulating construction and repair of damaged buildings” (International Risk Management Institute, www.irmi.com). The coverage afforded is broken down into three categories:

A. Coverage A – Loss to the Undamaged Portion of the Building
B. Coverage B – Demolition Costs
C. Coverage C – Increased Cost of Construction

So what does this mean? What exactly does the coverage do? Let’s use an example:

  • Your building is damaged due to a fire (a covered cause of loss). Half of your building is destroyed, while the other half remains untouched (not practical, but for demonstration purposes only).
  • After the fire, the local Town/City requires that the undamaged portion of the Building be torn down and rebuilt due to an enforcement of an Ordinance (condemned/safety concerns).
  • An unendorsed Property policy will cover the cost to rebuild the “damaged” portion of the building. However, it will not cover the cost to rebuild the “undamaged” portion of the building as this portion has not suffered damage from a covered peril.
  • The costs associated with tearing down the undamaged portion, clearing away its debris and rebuilding, would come out of your pocket, unless your Property policy includes Ordinance or Law insurance coverage at appropriate limits.

It is important to note that most unendorsed Property Insurance policies do not include Ordinance or Law coverage, or may include it at a very small sub-limit. Using the above example, here’s how coverage would apply:

A. Ordinance or Law Coverage A – Loss to the Undamaged Portion of the Building
Pays for the cost to rebuild the Undamaged Portion of the Building
Note: Most Insurance Companies can include Coverage A to the Full Building Limit for very little additional premium.

B. Ordinance or Law Coverage B – Demolition Costs
Pays for the cost to demolish and clear away the Undamaged Portion of the Building

C. Ordinance or Law Coverage C – Increased Cost of Construction
Pays for the increased costs associated with making the building compliant to current code (e.g. sprinkler requirements, elevator requirements, updated electrical or HVAC, handicap accessible ramps, etc.).

It is important to know if your building features any special characteristics or hazards that could cause increased costs associated with enforcement of a local ordinance. In very general terms, an older building would have more of an exposure than a newer one, as older buildings are often “grandfathered” from having to comply with many areas of updated building code; one would be forced to comply with today’s building code in the event of a covered loss and associated renovation/rebuild project.

Adequately insuring your building is the difference between being “made whole” by the insurance Company or having to pay out of pocket. To learn more about Ordinance or Law and other insurance-related topics, please contact Neil Lambert of PINE/Graphic Arts Insurance Agency at 508-804-4123, NLambert04@pine.org or Mike Kass of NorthStar Insurance Services at 781-431-2500 ext. 131 or mkass@nsins.com.