Coverage Corner

ORDINANCE OR LAW – NOT JUST AN OLD BUILDING PROBLEM!

By Cathy Trischan, CPCU, CRM, CIC, ARM, AU, AAI, CRIS, MLIS, TRIP

How many times has an insured responded to your recommendation for Ordinance or Law Coverage with this statement? “I don’t need that –my building is only [fill in the blank with a low number] years old, and it is up to code!” What many insureds don’t realize is that ordinance or law issues plague both old and new buildings. What are the Ordinance or Law coverages that should be considered for every building, and why are they so important?

Before beginning a discussion of Ordinance or Law Coverage, it is important to understand the problem. With the exception of a small amount of coverage for Increased Cost of Construction, the ISO Building and Personal Property Coverage Form (CP 00 10 10 12) states clearly that the cost of repair does not include increased costs attributable to enforcement of ordinances or laws regulating the construction, use, or repair of property. In addition, the Causes of Loss – Special Form (CP 10 30 09 17) contains an Ordinance or Law exclusion. Basically, the policy pays to put the building back the way it was prior to the loss. If anything extra needs to be done to comply with codes, the policy doesn’t pay. Problems continue on the Business Income and Extra Expense Coverage Form (CP 00 30 10 12). The period of restoration is the period of time during which coverage applies. The period of restoration doesn’t include any increased period required due to enforcement of any ordinance or law.

There are two primary ISO endorsements used to cover ordinance or law exposures for most insureds.

Ordinance or Law Coverage (CP 04 05 09 17) allows the insured to choose up to three separate coverages.

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

▲ Coverage B – Demolition Cost Coverage

▲ Coverage C - Increased Cost of Construction Coverage

If a building sustains major damage, the insured is often required to tear down the entire building. Fears are that it will not be structurally sound if repaired. In some jurisdictions, major damage occurs when a certain percentage of the building is damaged. In others, the decision about major damage is left to the discretion of the appropriate authorities. Imagine your insured, a restaurant, has a fire loss that damages 60% of the building, and the town requires the insured to take down the building before rebuilding. Coverage A pays the value of the undamaged portion of the building as part of the building limit of insurance. Without Coverage A, the policy pays only the value of the damaged 60%. The insured is left without the funds needed to rebuild.

The restaurant will need to pay to demolish the undamaged portion of the building and remove its debris. That’s where Coverage B comes in. A limit of insurance is chosen for Coverage B and shown on the endorsement.

Lastly, chances are excellent that the building codes have changed since the restaurant was originally built. Perhaps sprinklers are now required, and the electrical system must be updated. Coverage C gives the insured the additional funds to rebuild differently to satisfy building codes. A limit of insurance is chosen for Coverage C and shown on the endorsement, although a combined limit for Coverages B and C may be an option with many insurers.

There is one more problem to solve. Had the insured restaurant been allowed to repair the building, the period of restoration would have been six months. Now that the building must be demolished, with the insured needing to start from scratch and rebuild differently, the period of restoration is 12 months. In order to provide the insured with Business Income and Extra Expense coverage for the extra six months, the endorsement Ordinance or Law – Increased Period of Restoration (CP 15 31 09 17) is needed. This endorsement extends the period of restoration to include the additional time to comply with building codes. Although the endorsement does not show a specific limit or time period, it is important that the Business Income limit be high enough to cover the insured through this longer period of restoration.

There is one last consideration in writing Ordinance or Law coverage. Both endorsements include a Post Loss Ordinance or Law Option. Without this option, the insured will only have coverage to comply with codes in effect at the time of loss. Codes often change after an area sustains widespread damage, and the Post-Loss Option gives the insured the additional coverage needed to comply with the new changed codes.

As one can see, Ordinance or Law is not just an old building problem. It is an every building problem!

Til next time!

Cathy Trischan, CPCU, CRM, CIC, ARM, AU, AAI, CRIS, MLIS, TRIP is IA&B’s commercial lines education consultant. She works with our CIC and CISR programs, as well as our live CE webinars. Catch her at one of our upcoming courses: IABforME.com/education