Johnson Strategies LLC expert contributor, David Thompson CPCU, is often asked what he believes are the most undersold coverage’s by agents. His answer always includes the coverage which is the title of this article. We asked David to share his thoughts on Ordinance or Law Coverage, often called “Building Code Coverage” as an assist to agents and others in sharing the value and importance of this often undersold coverage.
Here is David’s article written for that purpose. Learn from it and understand that “every property owner” should consider the purchase and every agent should be fully informed as to its’ history, value and purpose.
Ordinance or Law Coverage Also Known As “Building Code Coverage”
By David Thompson, CPCU, AAI, CRIS
After a building has been damaged by something such as fire or windstorm, it is unfortunately often later discovered that the insurance policy covering the property did not have a coverage called, “ordinance or law coverage.” It is sometimes referred to as “O&L” by insurance agents or “building code coverage” by many consumers.
The Key Points:
- Almost every property insurance policy should have O&L coverage. This is the case whether the building in question is a home, office, hotel, restaurant, or any other structure.
- In general, insurance policies do not automatically provide O&L coverage.
- Even structures that are relatively new and/or built to current code need O&L coverage.
- Even a minor loss can trigger the need for O&L coverage.
- The cost for O&L coverage is often under a dollar per day.
The Background:
The concept of building codes is far from new. Hammurabi was the sixth king of Babylon and ruled from 1792 BC to 1750 BC. Hammurabi’s Code was one of the earliest written codes of law in recorded history. One code stated: “If a builder builds a house for someone, and does not construct it properly, and the house which he built falls in and kills its owner, then that builder shall be put to death. If it kills the son of the owner, the son of that builder shall be put to death.”
More recently, after hurricane Andrew hit south Florida in 1992 the deficiencies in many building codes became apparent and as a result the legislature adopted the Florida Building Code in 2002. The Florida Building Code is updated every three years and may be amended annually to incorporate interpretations and clarifications. Local jurisdictions can, and often do, adopt more stringent building codes. It’s important to note again that the Florida Building Code changes every three years.
Local jurisdictions often enforce multiple building codes. For example, one county government website lists just a few codes that are enforced: (There are more)
- 2018 International Building Code
- 2018 International Residential Code
- 2018 International Fire Code
- 2018 International Plumbing Code
- 2009 Energy Code
- 2017 National Electric Code
The Need:
There is often confusion about the need for O&L coverage since many insurance policies pay for losses on a replacement cost basis. That means, for example, if a 15-year-old roof were damaged by a lightning strike and the entire roof had to be replaced, the cost of a new similar roof would be paid; there would be no depreciation taken. Coverage is in effect, “new for old.” The key point, however, is that the insurance company owes money to replace the damaged property with similar property. Many times, the building code has changed, and the house or commercial building is no longer “built to code.” Materials that were present before the claim can’t be replaced by the contractor; new materials or construction features required by the building code must be used by the builder. In general, insurance policies are not structured to provide coverage for these upgrades. That leaves the policyholder in a bad spot because they can’t rebuild the structure like it was prior to the loss, but the insurance company does not pay for the cost to rebuild to the current building code. This results in a financial strain on the policyholder, often a significant amount of money.
While insurance policies differ, in general O&L provides three categories of coverage:
- Coverage for the undamaged portion of the building.
- The cost to demolish and haul away the undamaged portion of the building.
- The cost to rebuild to the current code.
An example of a damaged home will illustrate the need for O&L coverage:
- The home is insured for $800,000.
- A fire causes $500,000 of damage.
- The local building code requires that any structure with 50 percent or more damage must be demolished; that is $300,000 in the example.
- The cost to demolish and haul away the $300,000 undamaged portion is $50,000.
- The cost to rebuild the damaged portion to the current code is $40,000.
In this example, without O&L coverage on the policy the $300,000 undamaged portion of the building, the $50,000 to demolish and haul away the undamaged portion of the building, and the $40,000 to rebuild the damaged portion to current code is not covered. This results in an out-of-pocket cost of $390,000 to the policyholder.
An example of O&L on a commercial property policy is the 2021 Champlain Towers South condominium collapse in Miami-Dade County that tragically illustrates the need for O&L coverage. The building was insured for $30 million. News reports around the country showed about half of the entire building had collapsed, while the other half remained somewhat intact…undamaged. Explosives were used to demolish that undamaged portion after the initial collapse and all of that debris had to be hauled away; using explosive demolition techniques greatly increases the cost to demolish a structure. The condominium was constructed in 1981, and thus was 40 years old and certainly not built to current code. The building was within a few hundred feet of the Atlantic Ocean and the cost to rebuild to the current code would have been significant had the building been rebuilt, due to required wind mitigation building techniques and materials.
Stating, “My structure was just built and is built to code” is not a reason to fail to buy O&L coverage. Codes change frequently and those changes are seldom known by policyholders, and even many insurance agents.
The Takeaway
Policyholders should ask their insurance agent to provide a quote for the maximum O&L coverage available, regardless of the age of the structure. Break the cost down into a cost per day and compare that to the cost of your favorite morning beverage at a restaurant like Starbucks.
Insurance agents should routinely inform customers of the features and cost of O&L coverage and provide a quote for the coverage on any property policy.
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It’s not often you get an insurance article with a reference to Hammurabi’s Code. What a bonus!
It did not take long after Hurricane Andrew (15 months) for the Florida Legislature to pass a bill to require that every dwelling policy provide for Ordinance or Law Coverage (O&L). Along with the requirement that it be included at 25% of the Coverage A limit, was the option to exclude it via a signed exclusion.
This is similar to the uninsured motorist coverage requirement that if the insured did not reject it, then they have coverage.
I have learned that when the State of Florida mandates a coverage be included, unless it is rejected, in writing, that it must be really important. The legislators must have heard huge numbers of horror stories, where people lost their homes because of the lack of this valuable coverage and to their credit mandated this coverage be offered on every policy, unless rejected.
I never understood why insurance companies did not offer this coverage on dwellings prior to this mandate because they had always offered it on commercial buildings. To my knowledge no company has gone bankrupt due to O&L losses.
I have been in many of Mr. Thompson’s insurance classes where he spoke of this valuable coverage and has educated untold agents about the undamaged portion of the building part of this coverage.
You may not know that Mr. Thompson has a vanity license plate that says “Stack UM”. Maybe we can petition the DMV to allow him to change it to “Stack UM and Add O&L”.
At least you can add O&L to your dwelling policy.
Yes, I did know about David’s license plate and put a picture of it on his blog about Uninsured Motorist coverage. You sound like you might be someone who could become an expert contributor to my blog site. Are you interested in getting famous for absolutely no pay whatsoever? sj