Ordinance and Law

The Ordinance and Law Exposure There are a myriad of building codes that may come into play after a building has been damaged or destroyed. Many city governments follow the “universal” building code established by the International Code Council (ICC). The ICC code was implemented in 2000, so some cities may instead be following an older set of codes established by the Building Officials and Code Administrators (BOCA), the International Conference of Building Officials (ICBO), the Southern Building Code Congress International (SBCCI), or the Council of American Building Officials (CABO). And that’s just the building code. There are separate codes for electrical, plumbing and mechanical (heating and air conditioning). The requirements of federal laws, such as the Americans with Disabilities Act, must also be considered. Along the Texas coast, the Texas Windstorm Insurance Association enforces state laws regulating construction in hurricane-prone areas.

Codes are not necessarily consistent throughout a city or county. The code for one neighborhood may be different from the code applicable to a neighborhood a few blocks away! To make matters more complicated, growing cities and towns can annex new territories into their city limits at any time. Buildings within those annexed areas that were constructed years ago can be forced to comply with the city building codes when a building permit is required for reconstruction or repair after a loss.

Building laws generally create three separate and distinct post-loss requirements for a building owner.

1. Components of the damaged building must be upgraded to meet current building code requirements. For example, an older building with outdated electrical wiring must be re-wired with more expensive wiring in metal conduits.
2. When a building suffers damage that exceeds a certain percentage of the value of the building, usually 50 percent, the undamaged portion must be demolished. If the building owner decides to rebuild, the new building must comply with existing building codes.
3. If the loss caused a release of hazardous materials or pollutants, the building owner is required to assess the effects of those materials and respond by cleaning up the materials. For example, if the building contains asbestos, building codes require the building owner to contain and remove asbestos materials from the entire building.

These building code requirements create the following four exposures that are not covered by the typical insurance policy because they are excluded by the Ordinance and Law exclusion:

1. The increased cost to repair or replace the building as a result of stricter building codes that apply to reconstruction as well as new construction;
2. The expense of demolishing undamaged portions of the building and removing the debris;
3. The value of undamaged portions of the building, or the cost to rebuild those undamaged portions in compliance with current building codes; and
4. The cost to assess and respond to pollutants, fungus or hazardous materials.

Coverage for Ordianance and Law Exposures

The building and business personal property coverage form contains some limited additional coverages for these exposures.

The additional coverage for Increased Cost of Construction provides up to $10,000 or 5 percent of the building limit to cover increased costs of construction to comply with building codes following damage caused by a covered cause of loss. The coverage applies only if the optional coverage replacement cost has been selected, and it does not cover the expense for demolition or reconstruction of undamaged portions of the building, or the cost to assess and respond to pollutants, fungus or hazardous materials.

Coverage for these items, including a higher limit for increased costs of construction, can be obtained with endorsement CP 04 05 (Ordinance or Law Coverage). This form contains three coverages:

Coverage A – Coverage for Loss to the Undamaged Portion of the Building;

Coverage B – Demolition Cost Coverage; and

Coverage C – Increased Cost of Construction Coverage

These coverages can be purchased separately, but should be purchased together in all cases. The limit for Coverage A is included within the building limit shown in the Declarations. The limits for Coverages B and C can be separate or combined, the latter being preferred in case the amount estimated for one or the other is inadequate.

Business Income Considerations

If the insured purchases Ordinance or Law Coverage with endorsement CP 04 05 and also carries business income coverage, the insured should extend the business income coverage with endorsement CP 15 31 (Ordinance or Law – Increased Period of Restoration). This endorsement covers the loss of business income during the additional time required due to the enforcement of any building ordinance or law.

Determining Limits for Ordinance and Law Coverage

How much additional insurance does a policyholder need for Coverages B and C?

The only way to begin the process of determining the amount needed for Coverage C is to consult with a local architect or general contractor, or meet with the fire marshal and/or the building code official in the city where the building is located.

The limit for Coverage B should be the amount a demolition contractor would charge to demolish 50% of the building and clear the site.

How much does this coverage cost? The cost for Coverage A is an additional 15 percent of the premium to insure the building. The building rate applies to the amounts selected for Coverage B and C.

Whose job is it to determine the proper amount of insurance needed to cover current building codes? Ultimately it is the policyholder’s responsibility to establish property values and select the amount of insurance, but that doesn’t keep you safe from an E&O claim if the amounts are insufficient. Your proposals should clearly state that it is the customer’s job to tell you how much insurance they need.