Ordinance or Law: Because We All Love Surprises

Author: Michelle McArthur

Ordinance or Law sounds pretty serious – but what exactly does it mean?

Why Do Banks Use Ordinance or Law Coverage?

This is an optional property policy coverage intended to cover the increased cost of repairs when changes in regulations/building code cause a damaged building to cost more to repair than it otherwise would.

Example: Your roof is damaged by wind, which is a covered peril under your property policy. The policy will pay to repair the roof as it existed before the loss, using materials and methods that were acceptable when the building was originally constructed.

During repairs, the contractor discovers that local building codes have changed since the building was built. The new regulations now require a specific type of material that was not required under the old code.

Because of this change:

• The cost to repair the roof is higher than the standard repair cost
• The additional expense is not covered under the basic property policy limits, since it’s not direct damage from the wind—it’s the result of a change in legal requirement

Ordinance or Law (O&L)

Ordinance or Law (O&L) coverage pays for the additional cost to comply with current building codes. Without this coverage, the policyholder would be responsible for paying that extra cost out of pocket.

I’ll be honest, when I first learned about this coverage, I was shocked that this was a thing! As you can imagine, this has the potential to be very expensive! Properties in older neighborhoods could require numerous upgrades, it’s very unpredictable.

There are different types of protection available under the Ordinance or Law umbrella, and they typically come with separate limits.

So, why are there different types of O&L coverage? Let’s break them down:

Coverage A: Undamaged Portion of the Building

If local code requires that the entire building (or the majority of it) be demolished, this coverage pays for the value of the undamaged portion that must be demolished.

Coverage B: Demolition Costs

Covers cost to demolish and remove debris when demolition is required to bring the building up to code

Coverage C: Increased Cost of Compliance

Covers additional cost to rebuild or repair the property to comply with current building codes

Coverage D: Increased Period of Restoration (Business Income)

Covers additional loss of income caused by the extra time it takes to rebuild in order to bring the building up to code

Our clients typically require Coverage A to be provided up to 100% of the building replacement cost, and Coverage B & C to be provided up to 10% of the building replacement cost. This is important because code upgrades protect the collateral value, and if the borrower does not have O&L coverage, they may not be able to complete repairs.

Side Note: O&L coverage only applies when the initial damage is caused by a covered peril. Unfortunately, this coverage cannot be used for upgrades or code compliance due to wear and tear or voluntary renovations. (Would’ve been nice!)

The Bottom Line

Even if it’s a rare scenario, it’s one of those “better to have it and not need it” coverages!

Until next time!

MM

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About the Author:

Michelle McArthur
Senior Program Executive, Complex Commercial

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