Ordinance and Law Coverage: Are You Adequately Covered?

Blair Hanson

If I’m insured to rebuild my building after a fire, am I covered for the cost to bring it up to code

in the process? Yes. Maybe. But also maybe not.

Ordinance and Law coverage, also known as Increased Cost of Construction Coverage or Building Code Coverage, is one of the most misunderstood areas of property insurance. This is because while building codes are required to be met when you rebuild, your policy may not cover you for the increased cost of construction to meet those codes, and if you are covered you probably have strict limits.

What is Code Coverage? The insurance we buy is meant to replace what we had, not what we are going to build. An easy simplification is to compare it to your automobile insurance; if your car is destroyed the insurance company owes you for the car you crashed, not the car you’re going to buy. It’s exactly the same with a building. Property insurance coverage restores to “pre-loss condition”. In other words, to build it back exactly the way it was prior to the loss. The additional cost to bring that building up to code is not included in the basic limit of most policies. Instead, code costs are typically treated as a separate limit.

Why? Every building is different; therefore building code coverage must be customized for each policy. An insurance company charges based on the risk. For example, if a brand new $1M building burns down, when it burned it already met all current building codes so there would be no additional cost. However, if a $1M brick building built 80 years ago burns down, the increased costs to bring it up to current code would be substantial. Insurers manage risk by requiring the brick building owner to buy additional “code coverage”.

Building codes are continually changing including requirements such as new or improved sprinkler systems, elevators, better wiring, more effective insulation, more energy efficient windows, and handicap accessibility in common areas. In many cases, code costs

12 Community Associations Journal | June 2016

are 50% or more in addition to the building costs, adding $500,000 to the cost to rebuild the $1M brick building previously mentioned.

It’s important to understand that code upgrades are generally excluded from most basic coverage limits. Check for yourself. Open your association or personal homeowners policy and turn to the critically important section entitled Exclusions where you will likely find language similar to the following:

“… will not pay for (costs associated with): The enforcement of any ordinance or law: (1) Regulating the construction, use or repair of any property.”

There are different versions of the language, and each has its own importance with regard to the association’s ability to recover completely from a loss without having to pay code costs out of pocket, but essentially nearly all policies have the same type of limitation. Code is just not included in the big limit number (Coverage A).

Don’t panic when you find this in your policy. It’s probable that you will also find in your policy a section entitled “Additional Coverages” which is where you will find your code coverage. In most policies it is expressed as a percentage, commonly 10%, but there are as many versions and differences in these limits as there are different types of buildings. As a result, the insurance company treats code separately, and works with each insured individually to address their unique needs. Simply put there is not a one size fits all solution to code upgrades.

As an owner and community association professional it is your responsibility to understand your circumstance and insure it properly. Your insurance broker is a valuable resource regarding your coverage situation and can offer meaningful advice. But the single most knowledgeable person to consult is an adjuster, because adjusters are the ones responsible for applying the rules of the policy to the loss. They are like referees. They don’t make the rules they just enforce them. Asking an adjuster to review your policy is a very smart step.