July 14, 2022 | Insurance Coverage
Put simply, Ordinance and Law coverage protects the policyholder for the cost to upgrade their property due to the enforcement of new building codes in the event of a loss. Building codes are set by various levels of regulatory bodies and differ from one jurisdiction to another. They are in place for the occupants’ safety and may change over time. The upgrade costs could include demolition, reconstruction or remodelling of both damaged and undamaged portions of the building as well as increased costs of construction.
Not only do building codes change frequently but there are several types of codes such as electrical, plumbing, HVAC systems, roof and foundation, that could impact a property owner. If the property is several years old it’s likely that new standards are in place and the cost to overhaul an entire electrical or plumbing system is different than it would’ve been years prior. Depending on the jurisdiction, strict codes could require a total rebuild even if there isn’t a total loss.
In a standard property policy, the limit covers replacement costs which compensate the insured to rebuild the structure to the same standard and quality as prior to the loss. It is common for a property insurance statement to have an Ordinance and Law Coverage exclusion. This means replacement costs do not fully cover the building if upgrades due to building codes are required.
Ordinance and Law Coverage is divided into three sections. Let’s look at some examples as to how this coverage could play out in real-world scenarios, such as a fire loss when fire is an insured peril under All Other Perils coverage:
Coverage A: Undamaged Portion of the Building
If the building is only partially destroyed leaving 50% of the property intact, and the new code calls for deeper and wider footings than when the building was originally constructed, the Ordinance and Law Coverage could extend to cover rebuilding the entire property, including the undamaged portion.
Coverage B: Demolition
Demolition is tied to Coverage A. In the above example, this section would cover the demolition of the undamaged portion that needs to be rebuilt including the hauling away of debris.
Coverage C: Increased Cost of Construction
This coverage would be allocated to the actual cost of installing the new footings. Or in another example, if a new bylaw requires all buildings in that area to be upgraded to current electrical code, coverage C would respond to cover the increased cost of this construction.
Typically you will find the Ordinance and Law Coverage listed within the policy as a sublimit.* For example, a property limit of $1,500,000 could have a 10% sublimit, allowing for $150,000 of the limit to be applied to upgrades in compliance with current codes. It’s important to note that this sublimit does not increase the total limit of insurance but is rather a portion of the limit to be allocated to the upgrades as needed. Higher sublimits may be available as well.
Ordinance and Law Coverage only kicks in after an insured loss has occurred. Simply having this coverage on your policy does not provide limits for upgrading in a voluntary renovation. Going over and above what the current codes require is also not covered.
Ordinance and Law Coverage is triggered when a loss occurs by an insured peril. It does not apply to voluntary upgrades or renovations. Whether this coverage is available via sublimit, a portion of the total property limit, or as a rider added to the policy, it’s important to review your documents. Understanding your potential gaps in coverage will help prepare you against any substantial unexpected costs.