Ordinance or Law Coverage Explained

Man in a gray polo shirt draws architectural plans on a wooden table. A ruler and rolled papers are beside him.

Ordinance or Law Coverage is a key component of a commercial property insurance policy. It provides coverage for the additional costs incurred when rebuilding or repairing a commercial building to comply with updated building codes or regulations following a loss. This type of coverage is crucial because, after a loss (such as a fire or storm), the structure may need to be rebuilt or repaired to meet current local ordinances or laws, which may be more stringent than those in place when the building was originally constructed.

Here’s a more detailed breakdown:

1. Coverage for Increased Costs Due to New Codes

When a property is damaged, the local building codes may require specific upgrades that weren't part of the original construction. For example, the local authority may mandate that the building be made more accessible for people with disabilities, include additional fire safety measures, or comply with modern seismic standards.
Ordinance or Law Coverage would cover the increased costs of these upgrades that would not otherwise be covered by standard property insurance.

2. Key Components of Ordinance or Law Coverage

Coverage A: The Cost to Repair or Replace the Undamaged Portion of the Building. This covers the cost of repairing or rebuilding the undamaged portion of the building if the entire structure has to be torn down or rebuilt due to the enforcement of local laws. If part of the building is still intact, it may need to be brought up to code along with the new construction, which could involve substantial costs.
Coverage B: The Cost to Demolish and Remove the Undamaged Portion of the Building. If a structure is heavily damaged, and local ordinances require that the entire building be demolished (even if part of it is undamaged), this coverage will help pay for the demolition and removal of debris, which can be expensive.
Coverage C: The Cost of Rebuilding to Current Building Codes. This covers the additional expenses of rebuilding the property according to current regulations, such as updated fire protection systems, new insulation standards, or modernized electrical wiring, even if the damage didn’t directly result from these specific changes.

3. Why Is It Important?

Without Ordinance or Law Coverage, if your building is damaged and you need to rebuild, you would have to pay out of pocket for the cost to bring the property into compliance with updated building codes. Standard commercial property insurance typically does not cover the added costs for these upgrades, especially when the building codes change after the policyholder originally constructed the building.
This coverage is often crucial for older buildings or structures located in areas with rapidly changing local building codes.

4. Limitations

Policy Limitations: Ordinance or Law coverage may have specific sub-limits for each of the three components (A, B, and C), and these limits may vary depending on the policy.
Not Always Included: Some commercial property policies may exclude Ordinance or Law coverage, so it’s essential for property owners to specifically request this coverage or add it as an endorsement to their policy.

5. Example of How It Works

Let’s say a commercial building suffers extensive damage due to a fire. After the fire, the local government requires that the building be brought up to new energy efficiency standards, even though these standards didn’t exist when the building was initially constructed. The cost of implementing these energy-efficient measures would be covered by Ordinance or Law coverage, in addition to the basic costs of rebuilding the structure.

6. Cost of Ordinance or Law Coverage

The cost of this coverage is typically an add-on to your commercial property insurance policy. It’s relatively affordable compared to the potentially significant costs it could cover if a claim is made.
The premium will depend on factors like the age and type of building, local building codes, and the overall value of the property.

Summary

Ordinance or Law Coverage is designed to protect property owners from the added expenses of complying with updated building codes following a loss. It covers the costs to repair, demolish, or rebuild in accordance with local laws, which may be more stringent than when the building was originally constructed. This coverage is often essential for older buildings or those located in areas with rapidly evolving building requirements.

Disclaimer: The content contained in this blog is for informational purposes only. It should not be considered insurance advice since every client's needs and circumstances are different.. Bergen Insurance Group, LLC makes no representation as to accuracy, completeness, currentness, suitability, or validity of any information on this site and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. All statements represent the sole opinion of the author and is provided on an as-is basis. For an actual description of all coverages, terms and conditions, refer to your insurance policy.”