Ordinance or Law Coverage: Code for Recovery!

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...from the business income or extra expense recovery, notwithstanding the adequacy of the coverage in all other respects.

When the code requires demolition of the existing structure before reconstruction can begin, an even greater delay can be expected; or if rebuilding on the present site is prohibited, a new location must be found, again with a delay in resumption of operations.

In such cases the adjustment will be based on the time it would have taken to re-establish normal operations, restoring the property “as is” as opposed to the actual time needed in meeting current requirements. Obviously, this will introduce a second area of conjecture, beyond the basic question of how the business would have done had no loss occurred, and can complicate the adjustment even more than would normally be the case.

For example, assume an interruption due to a fire. In attempting to repair the building and restore operations–which apart from the code violations would take two months–it actually takes five months. The measure of loss under the basic business income coverage would be what the business would have done in the two months of shutdown versus what the business actually did in these two months. In computing the additional loss due to operation of building laws, the comparison is between the added three months of shutdown and what the business would have done in this same period of time. This additional loss is not covered unless the Ordinance or Law Exclusion has been eliminated by endorsement.

Increased Period of Restoration

The effect of the Ordinance or Law Exclusion on this coverage can be overcome by use of ISO endorsement CP 15 31 (or its equivalent), the Ordinance or Law–Increased Period of Restoration endorsement. This extends the Business Income or Extra Expense Coverage to include...

Height and Area Limitation Eliminated

With the introduction of the 10 90 edition of endorsement CP 04 05, a significant limitation under the Increased Cost of Construction Coverage was eliminated. Curiously, neither this limitation nor its eradication have triggered much attention within the insurance industry, nor did ISO mention the change in introducing the 10 90 endorsement.

Historically, since the Increased Cost of Construction Coverage came into common use, payment for the cost of repairing or replacing the building in compliance with current building or zoning laws was limited to property of “the same height, floor area and style” as the building damaged or destroyed.

Surprisingly, there seems to have been little or no judicial interpretation of this limitation, nor even mention of the limitation in descriptions of the coverage as found in insurance texts or articles discussing the coverage. Application of the limitation would obviously work a hardship on any insured who, having recognized the exposure of building law requirements, purchases a significant amount of the coverage, only to discover after loss that because of this limitation, the insurance will not pay fully for restoration in compliance with current code requirements.

Consider, for instance, such requirements as ramps or enlarged restrooms for handicap access, off-street parking requirements or similar building or zoning code provisions that have come into common use in recent years, that prohibit reoccupancy without additional floor area or height to achieve the same level of useable space and function that existed prior to loss. In the 04 02 endorsement, this limitation is shown as applying only to Coverage A, where it is of no consequence, but not to Coverage C where its application could severely limit the insurance recovery. Any insureds who arranged Increased Cost of Construction Coverage taking into account the old limitation should review their situation in light of this change and, if faced with requirements of increased building area to achieve the same function as before the loss, can now buy an increased amount of this coverage to pay fully for the cost of compliance with current requirements.

Similarly, insureds who have not provided this important coverage can now purchase adequate coverage to allow full recovery for the cost of compliance with building laws that require increased building size to achieve the same function as before the loss.


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