Ordinance or Law Coverage: Code for Recovery!

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...that would require demolition after loss. If this is not the case, then the need for Coverage Awith its added cost, may be open to question.

For Coverage B, the same question of need applies as for Coverage A, but the equation is much simpler.

What percentage of loss will require demolition–50 percent? 60 percent? 75 percent? Assume under the worst loss situation that the damage just reaches that percentage, so that demolition is required. Then insure for the estimated cost of demolition of the difference–50 percent of the property value, 40 percent, or 25 percent as the case may be. A demolition contractor can probably give at least a rough estimate of what this cost might be.

For Coverage C, the problem involves ascertaining the kind of upgrading that will be required to meet current code requirements. Two approaches can be used: (1) Arrive at a “ball park” figure for possible upgrade to code requirements and buy a little more than this figure to be safe. (Will an unsprinklered building require sprinklers? Will additional parking be required? Will earthquake resistant construction be required? Etc., etc. And what, in round figures, is the probable additional cost?); or (2) Do an elaborate study of the current codes as they relate to the present property, obtain cost figures for compliance, and buy the same amount of coverage these figures call for (or a little bit more).

The second method fits nicely into a well-designed disaster plan, as it does much of the work before a loss that would otherwise have to be done hastily after a loss occurs.

Exception – States With Valued Policy Laws

An exception to the general application of the Ordinance or Law Exclusion should be noted in states with valued policy laws. These laws, which apply to building insurance, provide that when a building damaged by a peril stipulated in the law (always fire and often explosion, windstorm and various other perils), is totally destroyed, the full amount of the policy must be paid, irrespective of the building’s actual cash value at the time of loss.

In the case of partially damaged buildings that must be demolished or significantly modified to satisfy a building or zoning law–resulting in a loss to the insured equaling or exceeding the value of the structure–the laws in most of these states consider this to be a constructive total loss, notwithstanding the Ordinance Law Exclusion, and require payment of the full limit of the building insurance.

But it must be kept in mind that even in valued policy states, no more than the limit of insurance is payable. Unless a high enough limit has been selected to cover the cost to replace in compliance with current codes, plus demolition cost if this may be required, the insurance will be inadequate to cover the entire cost to rebuild. Also, unless the increased cost to comply with building law is recognized and Ordinance or Law Coverage is provided, underwriters may be reluctant, especially in valued policy states, to insure for an amount in excess of the apparent replacement cost without considering this increased cost.

Height and Area Limitation of Replacement Building

A significant change in Coverage C, Increased Cost of Construction, was also made with the introduction of endorsement CP 04 05 10 90. See sidebar story page 7, for a discussion of this important change.

The Business Income Ordinance or Law Exclusion

The Ordinance or Law Exclusion (as found in the ISO Causes of Loss forms) also applies to the Business Income (formerly Business Interruption) and Extra Expense coverages, and can, in fact, sometimes have an even greater impact on either or both of these coverages than on the property loss settlement.

Any delay in restoration of occupancy or operations occasioned by the need to redesign or extend the period of construction to comply with current requirements is excluded...

“...even in valued policy states, no more than the limit of insurance is payable. Unless a high enough limit has been selected to cover the cost to replace in compliance with current codes, plus demolition cost if this may be required, the insurance will be inadequate to cover the entire cost to rebuild.”


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