Ordinance or Law Coverage: Code for Recovery!



...handicap accessibility—this dilemma is not uncommon. That’s why, more than ever, it is important to understand the Ordinance or Law Exclusion–and the coverage that addresses it. First, some background.

What is the Ordinance or Law Exclusion?

The Ordinance or Law Exclusion (found in current Insurance Services Office Commercial Property Causes of Loss forms as exclusion B.1.a.) states that the insurer will not pay for loss or damage caused directly or indirectly by:

“The enforcement of any ordinance or law:

Most other property insurance forms, including Homeowners and Highly Protected Risk forms contain a similar exclusion.

This exclusion is aimed at the application of building codes of various kinds—construction, electrical, plumbing, fire safety, etc.—that may require more expensive reconstruction materials, installations, design or methods after the loss than those used in the existing building; and zoning laws that may prohibit present occupancy, or that impose onerous building or lot size or frontage requirements or restrictions.

Some laws, even when allowing reconstruction with the same materials or design, also require that if the building is damaged beyond a specified percentage of its value (50, 60 or 75 percent is typical), the remaining portion of the building must be demolished before reconstruction can begin.

Of fairly recent origin are laws regarding environmental and pollution control that can require elaborate and expensive decontamination or, on reconstruction, require employment of elaborate and expensive pollution control devices or prohibit certain existing practices.

Also, more and more laws are being enacted relative to construction practices in earthquake, hurricane and flood zones. Restrictions on rebuilding along known earthquake faults or requirements that reconstruction meet earthquake resistant standards are common in many earthquake-prone areas, while in flood zones and coastal hurricane areas, laws prohibiting rebuilding or requiring elevation of buildings above the flood or tidal level are commonplace.

Most building and zoning laws include a “grandfather” clause that permits existing structures or occupancies to continue in use without needing to conform to the new requirements, but with the proviso that if the property is substantially damaged, compliance with the current law will be required in order to repair or rebuild.

Three Areas of Loss

Application of the Ordinance or Law Exclusion can produce three distinct and separate areas of uninsured loss: