By Lawrence Berman, Berman Adjusters

Be prepared by purchasing adequate Ordinance or Law property coverage

When you purchase insurance to protect your investment and/or commercial property, are you aware of the fact that the cost to comply with building codes is usually excluded? Many property owners are not. They are only confronted with this issue after a fire or other damage claim occurs. The cost to bring an older building into compliance with current life-safety regulations can be substantial.

Building codes change periodically and may encompass electrical wiring, sprinkler systems, emergency lighting systems, structural improvements and handicap accessibility. As a property owner or property manager, it is very important that you understand the Ordinance or Law Exclusion. Usually the clause states that the insurance company will not pay for loss or damage caused directly or indirectly by: “The enforcement of any ordinance or law, (1) Regulating the construction, use or repair of any property; or (2) Requiring the tearing down of any property, including the cost of removing its debris,”

This exclusion eliminates coverage for building codes which regulate construction, electrical, plumbing, life safety, zoning laws, etc. The normal replacement cost coverage provided is intended to give similar construction to what you had prior to the damage incident. Even when building codes allow reconstruction with similar materials and plan design, they may also require demolition of the undamaged section of the building.

This might be mandated if the structure is damaged beyond a specified percentage of its value (i.e., 50%., 60% or 70%). Also, issues involving pollution, environmental problems, septic systems, earthquake, hurricane and flood related construction would be excluded. Many municipalities have provisions allowing “grandfathering” which permits existing structures or occupancies to be used without upgrading to current requirements. Once a building is substantially damaged, compliance with all current building codes will be mandated in order to repair or rebuild.

You should seriously consider adding Ordinance or Law Coverage to your existing replacement cost policy so that if a property damage loss occurs, you will have insurance to pay all of the costs necessary to rebuild in compliance with the existing codes. The endorsement contains the following three coverages: Coverage A - the loss of value of the undamaged portion of the building when it must be demolished due to code requirements; Coverage B - Demolition Cost, which requires a specific amount of insurance; and Coverage C - Increased Cost of Construction, which also requires its own specific amount of insurance.

The current Ordinance or Law Coverage endorsement includes an exclusion for any costs associated with the enforcement of any ordinance or law regulating pollution controls or cleanup. In order to detemrnine the amount of Ordinance or Law Coverage, you might choose to apply a worst case scenario to each of the three sections - A, B and C. Once you have calculated the maximum amount of coverage that you might need, your insurance agent or broker should secure the necessary policy endorsement.

It might he helpful to have a code consultant and/or an insurance advisor assist in preparing an analysis of what codes might apply to your property and include this in a disaster recovery plan. The increased costs necessary to rebuild in compliance with existing codes may be substantial. As a real estate professional, you should be prepared for a catastrophe by purchasing adequate Ordinance or Law Coverage insurance to augment your replacement cost policy.

Lawrence Berman, SPPA is president of Berman Adjusters, Inc. dba Berman Adjusters, vice president, director and founding shareholder of TAG/The Adjusters Group, past president of the National Association of Public Insurance Adjusters and is secretary of the Massachusetts Association of Public Insurance Adjusters.

Next Article >>