An important coverage available to building owners is "Building Ordinance and Law Coverage." This coverage is not normally included in property insurance policies, but can often be added by endorsement for an additional premium.
In some situations (as mandated by Florida statutes) certain policies must include ordinance and law (O&L) coverage unless the client rejects the coverage in writing.
Whether the coverage is statutorily required or not, it's a very valuable option and all building owners (residential or otherwise) should be encouraged to obtain the coverage in order to provide the best possible protection.
Ordinance and Law Coverage Explained
Property insurance policies are designed to pay for repairs to a building that will put it back in the same condition that it was prior to a loss. The policy is not designed to pay for items that were not present prior to the loss. An example will illustrate the point.
Bill owns a house that is severely damaged in a fire. The insurance company prepares an estimate to replace the roof with 1/2-inch plywood, roof shingles stapled down, and no hurricane tie-down straps. Such repair will return Bill's home to the condition it was prior to the fire. However, when the contractor goes to pull the building permit he is told that the local building codes have changed since the home was built. The new code requires 3/4-inch plywood, roof shingles that are nailed down every eight inches, hurricane tie-down straps, and shutters on all exterior windows. The local officials tell the contractor that these new building code changes result from state and local laws regulating the reconstruction of a building that has been damaged more than 50% of its value. Unless the contractor agrees to complete the repairs in a manner that will comply with this new code, no permit will be issued.
The problem Bill faces is he must rebuild his house to the new code, but his policy won't pay for those increased costs unless his policy has O&L coverage. His $100,000 house sustained $60,000 of damage in this fire. That $60,000 would put the house back just like it was, but Bill can't rebuild like that because of the new building code. The contractor tells Bill that it will cost an additional $15,000 to rebuild his house and comply with the current building codes. An insurance policy that does not contain O&L coverage would pay only the $60,000 of Bill's fire loss; it would not cover the additional $15,000 needed to bring Bill up to code. (That comes from Bill's pocket!) Had Bill's policy included "Building Ordinance and Law Coverage" the additional $15,000 would have been covered.
What Florida Law Says
The only state we know of that has statutes addressing O&L coverage is Florida. That means for all other states besides Florida the standard property policies don't cover O&L claims. We don't proclaim to be an expert in the other 49 states, so residents of those states and agents there should refer to their own statutes for assistance.
The state of Florida enacted a statute dealing with O&L coverage shortly after Hurricane Andrew and revised the statute after both the 2004 and 2005 hurricane seasons. Part of that statute states:
627.7011 Homeowners' policies; offer of replacement cost coverage and law and ordinance coverage.
(1) Prior to issuing a homeowner's insurance policy on or after October 1, or prior to the first renewal of a homeowner's insurance policy on or after October 1, 2005 , the insurer must offer each of the following:
(a) A policy or endorsement providing that any loss which is repaired or replaced will be adjusted on the basis of replacement costs not exceeding policy limits as to the dwelling, rather than actual cash value, but not including costs necessary to meet applicable laws and ordinances regulating the construction, use, or repair of any property or requiring the tearing down of any property, including the costs of removing debris.
(b) A policy or endorsement providing that, subject to other policy provisions, any loss which is repaired or replaced at any location will be adjusted on the basis of replacement costs not exceeding policy limits as to the dwelling, rather than actual cash value, and also including costs necessary to meet applicable laws and ordinances regulating the construction, use, or repair of any property or requiring the tearing down of any property, including the costs of removing debris; however, such additional costs necessary to meet applicable laws and ordinances may be limited to either 25 percent or 50 percent of the dwelling limit, as selected by the policyholder, and such coverage shall apply only to repairs of the damaged portion of the structure unless the total damage to the structure exceeds 50 percent of the replacement cost of the structure. An insurer is not required to make the offers required by this subsection with respect to the issuance or renewal of a homeowner's policy that contains the provisions specified in paragraph (b) for law and ordinance coverage limited to 25 percent of the dwelling limit, except that the insurer must offer the law and ordinance coverage limited to 50 percent of the dwelling limit. This subsection does not prohibit the offer of a guaranteed replacement cost policy.
(2) Unless the insurer obtains the policyholder's written refusal of the policies or endorsements specified in subsection (1), any policy covering the dwelling is deemed to include the law and ordinance coverage limited to 25% of the dwelling limit. The rejection or selection of alternative coverage shall be made on a form approved by the office. The form shall fully advise the applicant of the nature of the coverage being rejected. If this form is signed by a named insured, it will be conclusively presumed that there was an informed, knowing rejection of the coverage or election of the alternative coverage on behalf of all insureds. Unless the policyholder requests in writing the coverage specified in this section, it need not be provided in or supplemental to any other policy that renews, insures, extends, changes, supersedes, or replaces an existing policy when the policyholder has rejected the coverage specified in this section or has selected alternative coverage. The insurer must provide such policyholder with notice of the availability of such coverage in a form approved by the office at least once every 3 years. The failure to provide such notice constitutes a violation of this code, but does not affect the coverage provided under the policy.
(3) In the event of a loss for which a dwelling or personal property is insured on the basis of replacement costs, the insurer shall pay the replacement cost without reservation or holdback of any depreciation in value, whether or not the insured replaces or repairs the dwelling or property.
(4) Any homeowner's insurance policy issued or renewed on or after October 1, 2005, must include in bold type no smaller than 18 points the following statement:
"LAW AND ORDINANCE COVERAGE IS AN IMPORTANT COVERAGE THAT YOU MAY WISH TO PURCHASE. YOU MAY ALSO NEED TO CONSIDER THE PURCHASE OF FLOOD INSURANCE FROM THE NATIONAL FLOOD INSURANCE PROGRAM. WITHOUT THIS COVERAGE, YOU MAY HAVE UNCOVERED LOSSES. PLEASE DISCUSS THESE COVERAGES WITH YOUR INSURANCE AGENT."
The intent of this subsection is to encourage policyholders to purchase sufficient coverage to protect them in case events excluded from the standard homeowners policy, such as law and ordinance enforcement and flood, combine with covered events to produce damage or loss to the insured property. The intent is also to encourage policyholders to discuss these issues with their insurance agent.
(5) Nothing in this section shall be construed to apply to policies not considered to be "homeowners' policies," as that term is commonly understood in the insurance industry. This section specifically does not apply to mobile home policies. Nothing in this section shall be construed as limiting the ability of any insurer to reject or nonrenew any insured or applicant on the grounds that the structure does not meet underwriting criteria applicable to replacement cost or law and ordinance policies or for other lawful reasons.
Several issues are important here. First, this statute applies only to policies issued by "admitted" insurance companies. "Surplus lines" insurance companies are not required to comply with this statute, although some may voluntarily do so. Next, the statute applies only to homeowners policies and does not apply to dwelling policies or commercial insurance policies. The statute does not apply to mobile homeowners policies. According to the Florida Administrative Code (69O-167.011) the requirement does not apply to HO-4 and HO-6 policies. Policies issued by Citizens Property Insurance Corporation are subject to the statute if they are of the homeowners type policy.
How Much Coverage is Included in Policies
The 2005 and 2006 Florida legislative sessions changed the Florida statute dealing with coverage found in homeowners policies. The statute mandates that an additional 25% or 50% (at the choice of the policyholder) of coverage be included for O&L losses, and this coverage is additional insurance. For example, Bill has a policy providing $100,000 of coverage on his house. In this example Bill has a choice of $25,000 or $50,000 of O&L coverage. This means his policy could pay up to $125,000 or $150,000 for a covered claim if ordinance and law coverage became involved. A homeowners insurer must offer both 25% and 50% options; if the insured makes no selection or rejection then the policy must be issued with at least the 25% amount, with the option still present to buy 50%. (Some insurers issue at 50% with the option to select 25% or reject coverage. The statutes do not prohibit this.) This 25% or 50% coverage applies unless the insured has signed a rejection form. (F.S. 627.7011(2) requires the policyholder to sign a rejection form if coverage is not desired.) Once signed, the rejection remains valid indefinitely, although the statute does require the insurance company to send the insured a notice of the opportunity to add or delete O&L coverage at least every three years. (The form does not have to be signed by the insured each three years - the only requirement is that it be sent to the insured by the company). Some companies do not allow the insured to reject the 25% or 50% coverage, something not prohibited by statute. Additionally, while not required, some companies offer O&L coverage at percentages above 25% or 50%, as high as 100% increased limits in some cases. Of course not every cost associated with rebuilding to code is covered. For example, if the increased cost is due to having to comply with ordinances in the removal of pollutants there is no coverage. Check the policy and endorsement for actual coverage language.
For all other policies besides homeowners policies, generally there is no O&L coverage included automatically. This would hold true for policies covering rental dwellings, apartment houses, condominiums, flood losses, and all other commercial structures. It's important to note that most building codes address all buildings, not just private dwellings. Considering that fact, it's important that the appropriate O&L coverage be added to the policy by endorsement.
For commercial property insurance O&L coverage may be added by endorsement. Under the ISO Building and Personal Property Coverage Form dated April 2002 there is limited coverage for "Increased Cost of Construction" with a limit of 5% of the limit of insurance or $10,000, whichever is less. For proper protection increased limits are likely needed via endorsement since this limited coverage is not as comprehensive as adding O&L coverage via endorsement. O&L coverage is a little more complex when dealing with a commercial risk. For commercial property insurance, the O&L coverage is divided into three separate categories of coverage in one endorsement. An insured may purchase one, all or any combination of these coverages which are summarized below:
Coverage A - Coverage For Loss To The Undamaged Portion Of The Building. The unendorsed property policy pays only for the portion of the building that is damaged. For example, if a building is insured for $1 million and suffers a $600,000 loss, the property policy would pay $600,000. The remaining $400,000 is not covered because that part of the building is not damaged. Coverage A would pay the insured for the undamaged portion of the building.
Coverage B - Demolition Cost Coverage will pay to tear down and haul away the undamaged portion of the building. While the debris removal coverage in the unendorsed policy will pay to clear the damaged portion of the building (up to the appropriate limit) the undamaged portion may need to be torn down and hauled away. A limit of insurance adequate to accomplish this needs to be selected by the insured, possibly after consultation with a contractor.
Coverage C - Increased Cost of Construction Coverage responds when a building must be torn down and rebuilt according to the new code. The increased cost to meet current codes may need to be determined with the assistance of a contractor familiar with current building codes.
The Florida Statewide Building Code
While there may be other building codes in various counties, those will not be addressed here. One issue of importance is the Florida statewide building code that took effect on March 1, 2002 and has been modified several ties since. There are numerous issues addressed in that code, far too numerous to cover here. (Visit www.floridabuilding.org for comprehensive information on all aspects of the code.) In simple terms, a common building code is established for the entire state of Florida and all cities and counties must comply with this code. Local codes may be more stringent than the Florida statewide code, but not less stringent. Different areas of the state are impacted differently by the statewide code. In general, those areas closest to the coast have the most stringent building requirements imposed upon them.
One of the more significant issues addressed in the statewide code is the requirement that existing buildings must be rebuilt to the new code if they sustain a certain amount of damage. Since the code is so complex it will not be analyzed here but for the sake of discussion (and as an example) assume that the code required a damaged building to be rebuilt to the current code in the following circumstance:
When repairs and alterations amounting to more than 50% of the value of the existing building are made during any 12-month period, the building or structure shall be made to conform to the requirements for a new building or structure or be entirely demolished.
For example, if Bill owns a $100,000 structure and it sustains $50,001 or more in damage during a fire or hurricane, Bill must rebuild his structure to meet the new statewide code. Without O&L coverage Bill is paid only to put the building back like it was, something the code won't allow. He either has to build it back to code or demolish it. If Bill has O&L coverage on his policy there will be coverage to rebuild and comply with the new code, up to the limit of O&L coverage Bill has selected. Other complications come up too, such as if Bill does not rebuild he does not receive "replacement cost" coverage and is instead paid based on an actual cash value (depreciated) basis. The benefits of O&L coverage are obvious.
Building ordinance and law coverage pays to rebuild a structure to comply with current building codes. Coverage provided by un-endorsed insurance policies to rebuild to the current code is limited or non-existent, and clients should be advised to purchase ordinance and law coverage on all buildings to provide the best coverage at the time of a loss.
Copyright FAIA, 9/4/07, David Thompson