Ordinance or Law Exclusions are standard in the Commercial Property Policy, and can prevent a full recovery of loss after a major property loss. Ordinance or Law consists of 3 coverage parts, explained later in more detail, but essentially covers the extra costs to repair or reconstruct the “undamaged” portion of a building and or the additional costs to comply with current building codes for the damaged portion.
You may have been told that if you have a Replacement Cost clause on your policy you will get “new for old- if your building burns down the Insurance Company will pay to build you a new building”- right?… BUT even with Replacement Cost, an “unendorsed” policy will only pay to replace what you already have in the building prior to the loss. Any additional costs that may be incurred to comply with a city or town’s current building codes are NOT covered. Building Codes are constantly changing. After your building suffers a fire you may discover that the building codes in your area now require you to install an improved sprinkler system, better wiring, handicap accessibility or more recently requirements of environmental or pollution controls, just to name a few. These additional unexpected costs can add 50% or more to the cost of rebuilding.
For these reasons, it is vital for a business to consider the Ordinance or Law Coverage. Insurance companies will not pay for loss or damage caused directly or indirectly by the enforcement of any ordinance or law. The policy is not designed or priced to cover the added cost of compliance that may require more expensive reconstruction materials, installation, design, including architect and engineering costs to meet current requirements in zoning and building codes.
Ordinance or Law Coverage is available for three separate areas of the uninsured loss:
Coverage A- Loss of the Value of the “Undamaged” Portion of the Building– when the building must be demolished or modified to meet current code requirements.
In the event of a partial loss to the building some jurisdictions require that if the building is damaged beyond a certain percentage (ie 50-75%) the remaining portion of the “undamaged” building must be demolished before reconstruction can begin.
Coverage B- Cost of Demolition and Debris Removal of “Undamaged” Portion of the Building – to be torn down or modified. (There is some coverage for Debris Removal for the “damaged” portion of the building under the Property Policy)
Coverage C-Increased Cost of Reconstruction– The added cost to repair or rebuild as a result of current building codes, as previously discussed, and/or reconstruction or renovation of the undamaged portion whether demolition is required or not.
Determining a coverage limit for each of the three coverage parts can be a difficult task. It is advisable to do some research and become familiar with local and state building and zoning laws and how they apply to your town and neighborhood. A consultation with the building department in your city or town can be very helpful. A Real Estate Law Attorney may also provide valuable information to consider before deciding on the limit of insurance.
Establishing a “worst case” scenario and contacting a local builder and demolition contractor to determine an average cost per square foot for demolition and removal as well as any special hazard issues that your building may have, such as asbestos, and the added costs to address these issues will further help to estimate the costs associated with a potential loss.
Careful planning and preparation will pay off. The more time and effort put into researching these potential costs, the more accurate your chosen coverage limits will be at the time of a loss. The best time to plan for these unforeseen expenses is before the loss occurs.