Every state, city, or local municipality has different codes and requirements that residences and buildings must abide by. In some cases, there may even be federal requirements depending on the location. As time passes, these requirements will change as new ordinances or codes are enacted. Most of the time, existing buildings that may not meet these codes are “grandfathered” from needing to make these updates immediately, but there can be time limits to grandfather clauses, and there could be instances where updates need to be made immediately.   

However, in the case of a covered loss at one of those grandfathered buildings, the location will need to be brought up to the current code during the repair process in order to pass inspections. In extreme cases, local or state codes could require a building to be demolished and completely rebuilt from the ground up in order to meet code. If your client’s property insurance policy does not include Ordinance or Law, their coverage will likely only extend to the repairs needed to bring the home back to its previous state, and the additional costs that could be needed to bring the building up to code would not be covered. If you or your client suspects that their property does not meet current building codes, Ordinance or Law is important coverage to consider. 

 What does Ordinance or Law cover?

There are three components to a typical Ordinance or Law policy endorsement: 

1. Coverage for the Undamaged Portion of the Building: This applies to areas of the property that were not directly damaged by the covered loss, but still need work done to be brought up to code. In cases where the building requires demolition, coverage extends to the full value of the building, not just the repair costs for the damaged portions.  
2. Coverage for Demolition Costs: If a building needs to be demolished in alignment with local ordinances, this aspect of coverage can cover those expenses. 
3. Coverage for Increased Cost of Construction: Additional expenses for materials required to bring the property up to code, beyond the property’s coverage limit.  

 What kinds of updates may be required to bring a property up to code?

1. Weatherproofing:
   1. In areas prone to hurricanes, new local ordinances may require dwellings to withstand high winds, be outfitted with storm shutters, or utilize certain roofing materials.
   2. In areas prone to flooding, ordinances may require certain elevations or tilting. 
2. Fire Safety:
   1. There may be new requirements for hard-wired smoke detectors or having smoke detectors placed in certain rooms.
   2. Some areas may have placement or frequency requirements for fire extinguishers, fire escapes, or sprinkler systems. 
3. Handicapped Accessibility: 
   1. Some cities may require ramps or other ADA-compliance features in the home. 
4. Plumbing or Wiring:
   1. New local ordinances may eliminate compliance of older wiring types or require updates to water/plumbing systems.

Shouldn’t a Replacement Cost settlement method cover these necessary updates? 

Not necessarily. Replacement Cost coverage is intended to replace damaged property with the same or like materials, NOT upgraded materials. So, if local ordinances now require your investor client to have hurricane shutters and the home’s windows are damaged, the property coverage will provide reimbursement for the same kind of windows installed on the house before, but not the extra cost of the hurricane shutters. 

Let’s look at some scenarios:

Scenario 1 

A kitchen fire destroys 50% of your client’s beach vacation rental. The home had battery-operated smoke detectors in the main living areas. Since the home was built, the area’s local building codes have changed, now requiring residences along the beach to be raised on stilts and have hard-wired smoke detectors in every hallway, bedroom, and kitchen. This means that the entire structure will need to be demolished and rebuilt on piers with the new wiring. 

A standard property policy would cover the cost of demolishing and rebuilding the portion of the property that was damaged by the fire with the same battery-operated smoke detectors. But this would not meet the current code. Without Ordinance or Law coverage, the additional expenses to demolish and rebuild the other 50% of the structure, plus the new wiring and additional smoke detectors would be paid for out of pocket by the investor.  

Scenario 2

On a smaller scale, say the same kitchen fire destroys 50% of one side of a midwestern duplex with battery-operated smoke detectors in main living areas. The local ordinance now requires hard-wired smoke detectors in every hallway, bedroom, and kitchen. 

A standard property policy would cover the cost to repair damage caused by the kitchen fire, but both units of the duplex (including the undamaged unit), will need to be newly equipped with hard-wired smoke detectors where they didn’t previously exist. 

If your investor client’s property policy contains an Ordinance or Law endorsement, these additional expenses can be covered. Depending on the policy, the amount of additional coverage afforded can differ, and usually, the three components of coverage will have unique limits. 

The costs to cover updates needed to meet the current code can increase the cost of repairs by as much as 50% (or more). Don’t let your clients get stuck with significant out-of-pocket costs. Discuss the importance of Ordinance or Law coverage for their locations today.