Ordinance or Law Coverage
Ordinance or law coverage pays for the additional cost of repairing or rebuilding a property to comply with current building codes and ordinances after a covered loss. Standard commercial property insurance pays to restore a building to its pre-loss condition — but it does not pay the additional cost of meeting modern building codes that were not in effect when the building was originally constructed. For older buildings in particular, the gap between what a standard property policy pays and what it actually costs to rebuild in compliance with current requirements can be substantial.
The Three Components of Ordinance or Law Coverage
Ordinance or law coverage is typically structured around three distinct coverage components:
- Coverage A — Loss to the Undamaged Portion: When a partial loss triggers a local ordinance requiring demolition of the undamaged portion of the building, this coverage pays for the value of the part of the building that had to be torn down even though it was not directly damaged by the covered peril.
- Coverage B — Demolition Cost: Pays the cost of demolishing and removing the undamaged portion of the building when required by ordinance, which is not covered under a standard property policy.
- Coverage C — Increased Cost of Construction: Pays the additional cost of rebuilding the damaged and undamaged portions of the building in compliance with current building codes, including requirements for updated electrical systems, accessibility features, fire suppression systems, energy efficiency standards, and structural upgrades.
Why Older Buildings Face Greater Exposure
Many buildings were constructed under codes that no longer reflect current standards. A building that is 20, 30, or 40 years old may need significant upgrades to electrical systems, plumbing, fire protection, and structural elements in order to comply with current codes when rebuilt after a loss. In some jurisdictions, a building that is damaged beyond a certain percentage of its value — often 50% — may be required to be demolished entirely and rebuilt from scratch to current code standards, even if the owner would prefer to repair what remains. Without ordinance or law coverage, these additional costs fall to the property owner.
Industry Considerations
Ordinance or law exposure affects property owners across every industry — retail, office, hospitality, industrial, and mixed-use properties all face this risk if the building is not of recent construction. The significance of the exposure depends on the age and construction type of the building, the local jurisdiction and its enforcement practices, and the value of the property relative to the cost of meeting current code requirements. Etowah Insurance Group works with commercial property owners to evaluate ordinance or law exposure and ensure that their property program addresses it appropriately. A consultation is the best starting point for any owner of an older commercial building.
