Ordinance or Law Coverage

Ordinance or law coverage addresses the gap between what standard property insurance pays and what it actually costs to rebuild when current building codes are stricter than the codes under which the building was originally constructed. This coverage is particularly important for older apartment buildings that may predate modern fire codes, accessibility requirements, energy efficiency standards, and structural regulations.

The coverage has three components. (Source: ISO Ordinance or Law Coverage Endorsement CP 04 05) The first covers the loss in value of the undamaged portion of a building that must be demolished because local ordinance requires it, such as when a building is more than 50% destroyed and the code requires complete demolition rather than repair. The second covers the cost of demolishing the undamaged portion and clearing the site. The third covers the increased cost of construction necessary to bring the new building into compliance with current codes.

For example, if a fire destroys 60% of an older apartment building and the local building code requires that any structure more than 50% damaged be brought into full current code compliance, the entire building may need to be demolished and rebuilt to modern standards. The added costs of ADA-compliant features, updated fire suppression systems, current energy codes, and modern structural requirements can add 20% to 40% to the total rebuilding cost.

Building codes are updated regularly, and older apartment buildings often do not comply with current standards. They were built to the codes in effect at the time, and most jurisdictions do not require retroactive compliance unless the building undergoes major renovation or suffers significant damage. This means many apartment owners are unaware of how much additional cost they would face if forced to rebuild to current standards.

Standard property insurance pays to restore the building to its pre-loss condition, not to current code requirements. (Source: ISO Commercial Property Conditions Form CP 00 30) The difference can be enormous. Modern sprinkler system requirements, ADA accessibility mandates, updated electrical and plumbing codes, energy efficiency standards, and seismic retrofitting requirements can add hundreds of thousands of dollars to a rebuilding project.

Without ordinance or law coverage, the apartment owner must pay these additional compliance costs out of pocket, which can strain finances at a time when the business is already dealing with the disruption and lost income from the original property loss. This coverage is often available as an endorsement to the property policy for a relatively modest additional premium.