BP 04 46–ORDINANCE OR LAW COVERAGE

(September 2022)

INTRODUCTION

Ordinance or law construction considerations are quite important as building codes are upgraded regularly. These considerations improve buildings’ ability to resist windstorm, earthquake, fire, and collapse and accommodate handicapped persons under the Americans with Disabilities Act (ADA). Older buildings are more likely to encounter ordinance or law issues and their related costs as a precondition to rebuilding after a loss.

The property section of the Insurance Services Office (ISO) Businessowners Coverage Form excludes costs to comply with construction requirements established by ordinances or laws. Further, the language in the loss payment section reinforces this by stating that replacement cost does not include any additional costs due to complying with any laws or ordinances that relate to construction.

The BOP does include Increased Cost of Construction coverage under its Additional Coverage section subject to a $10,000 limit. Examples of such increased costs that could be paid are changing bathrooms to be handicap accessible, adding wheelchair ramps, lowering water fountains, and similar requirements that ADA mandates. While $10,000 may be helpful for such minor changes, it is inadequate if an ordinance requires the adding of automatic sprinklers or widening of the hallways.

The amount of ordinance or law coverage needed depends on the specific building and its occupancy. Coverage may not be needed at all if the building is newer or there are not any specific ordinances or laws that apply to the specific occupancy. For others, it might be the difference between resuming operations and closing for good after a covered loss.

The good news is that BP 04 46–Ordinance or Law Coverage is available. It covers both the property and the business income associated with complying with ordinances and laws that had been grandfathered but come into play after a covered direct damage loss occurs.

BP 04 46–ORDINANCE OR LAW COVERAGE ANALYSIS

This analysis is of the 07 13 edition of this endorsement. Changes from the 01 06 edition are in bold print.

Endorsement Schedule

The endorsement schedule has spaces to select the locations covered and the coverage(s) that apply. BP 04 46 covers the following:

A. Each Coverage

Each building or structure to be covered must be listed on the endorsement schedule or on the declarations. Space considerations may require using a separate endorsement to list multiple covered locations. Selecting Coverage 1 requires a checkmark in the box provided. Selecting Coverage 2 or Coverage 3 requires entering a limit of insurance for each in the spaces provided. Coverage 2 and Coverage 3 can be combined with a single limit entered in the space provided that applies to both coverages.

Business Income and Extra Expense Optional Coverage requires entering Yes or No in the space provided. The number of hours waiting period for the period of restoration that applies to this optional coverage must be entered in the space provided if this coverage is selected.

Note: There is no extension of coverage for other structures at the location or for newly acquired or constructed structures. Each building or structure to be insured must be listed on the schedule.

B. Application of Coverage(s)

This is the insuring agreement. It also establishes some basic guidelines.

1. Coverage applies if an ordinance or law that is in place at the time of loss regulates construction, repair, or demolition at the premises or establishes zoning or land use. This coverage provides only the minimum costs to meet those standards. It does not cover any losses or costs that exceed actual requirements.

2. A building must sustain direct physical damage from a covered cause of loss before this coverage applies. There is no coverage if the loss or damage that triggers complying with an ordinance or law is caused by or results from an excluded cause of loss.

3. Part of the loss or damage may be from a covered cause of loss and part from an excluded cause of loss. In that case, the insurance company pays only the proportion that the covered direct physical damage bears to the total. Section H of this endorsement has an example that explains this concept. However, it pays the full amount of loss if the covered direct physical damage by itself would have required complying with the ordinance or law.

Note: “Complying with” as stated above replaces “enforcement of” in the 01 06 edition.

C. Pollutants and Fungi

1. Loss or damage to covered property due to contamination by pollutants or any activity of fungi, wet rot, or dry rot that leads to enforcing or complying with ordinances or laws that require demolishing, repairing, replacing, reconstructing, remodeling, or remediating is specifically excluded.

Note: The 01 06 edition listed “bacteria” along with fungi, wet rot, and dry rot. The 07 13 edition does not.

2. There is no coverage for any costs that an ordinance or law requires or that any insured or others incur to address, respond to, or assess the effects of pollutants, fungi, wet rot, or dry rot in any way.

Note: This endorsement differs from many other coverage endorsements because it lists the exclusions before it states the coverage that applies.

D. Coverage

1. Coverage 1–Coverage for Loss to the Undamaged Portion of the Building

A covered cause of loss may damage only part of a building. This coverage applies to the part that is not damaged. It covers the value of the undamaged part that must be demolished in order to comply with an ordinance or law. This is not a separate limit of insurance and does not increase the limit of insurance on the declarations that applies to the affected building.

 

Example: Merrill’s Office Complex is a five-story frame building located downtown. The current ordinance requires that construction materials for multi-story buildings be masonry non-combustible or better. Older buildings are exempt and grandfathered from this ordinance unless the building damage meets or exceeds one-third of its value. A windstorm damages 60% of the office complex, so Merrill must comply with the terms of the ordinance. The Businessowners Coverage Form building limit is $2,500,000. The building coverage pays $1,500,000 for the damaged part of the building. This coverage pays up to $1,000,000 for the undamaged portion that must be demolished to comply with the ordinance.

 

2. Coverage 2–Demolition Cost Coverage

This covers the cost to demolish the undamaged portion of a building that a covered cause of loss partially damages. A law or ordinance must be in place that requires demolishing the undamaged portion of the building. The insurance company pays the lesser of the amount spent to comply with an ordinance or law that requires demolishing and clearing the site of the described premises or the demolition cost limit of insurance on the endorsement schedule.

Note: “Comply with” as stated above replaces “enforcement of” in the 01 06 edition.

Note: Demolition can be costly, especially in downtown areas. The named insured should carefully consider the limit of insurance it may need for this coverage.

 

Example: Continuing the example above, Merrill’s must be imploded due to its proximity to other buildings in the area. The cost to do so is $500,000. In addition, the cost to clear the site of both the part of the building that the covered cause of loss damaged and the undamaged portion that must be imploded is $200,000. This coverage pays to demolish and clear the demolished portion if the limit of insurance is sufficient. The debris removal coverage under the Businessowners Coverage Form's property coverage pays to remove the damaged debris.

 

3. Coverage 3–Increased Cost of Construction

This coverage applies to the costs to rebuild the part of the building that was demolished or removed in order to comply with the ordinance or law. The other two coverages apply to demolition. This coverage applies to the cost to start over and the limit selected should reflect it. Covered costs include those necessary to repair, rebuild, or reconstruct the property due to enforcing building, zoning, or land use ordinances or laws. Coverage also applies to the increased costs to reconstruct or remodel undamaged sections of the building, even if demolition is not required.

If the damaged property is repaired or rebuilt, the construction must be for a similar occupancy unless current zoning or land use ordinances or laws require a different one. The costs are the minimum required to comply with the ordinance or law.

Note: The insured that wants to upgrade or improve the quality of construction must do so at its own expense, not the insurance company's expense.

The company does not pay any increased cost of construction if the building is not actually repaired or replaced. Similar to Coverage 2, the loss payment provision in the property loss conditions states that the company does not pay on a replacement cost basis until after the property is actually repaired or replaced.

 

Example: Merrill decides to rebuild at the same location. This means the building construction must be masonry non-combustible. The cost to rebuild this way is $10,000,000, $5,000,000 more than the $5,000,000 building limit. In order to be fully covered, Merrill needs a $5,000,000 limit for increased cost of construction.

E. Loss Payment

1. Provisions

Any of the following payments are subject to Apportionment in B. Application of Coverages(s) above. Section H of this endorsement has an example that explains this concept.

2. Coverage 1–Loss to the Undamaged Portion of the Building

This loss payment cannot be adjusted separately from the damaged building. What happens to the damaged portion must also happen to the undamaged portion because it is a single building. The payment is determined using either item a. or b. below:

a. The property may be repaired or replaced at either the same location or another location. The insurance company will pay the lesser of the building’s limit of insurance or the amount the named insured actually spends to repair or rebuild it. Payment is limited to costs needed to construct a building that is similar to the original one at the same location.

b. The property may not be repaired or replaced. The insurance company pays the building’s limit of insurance or its actual cash value at the time of loss, whichever is less.

3. Coverage 2–Demolition Cost Coverage (Separate Limit)

The insurance company pays the Coverage 2. limit of insurance on the endorsement schedule or the amount the named insured actually spends to demolish and clear the described premises' site, whichever is less. This does not apply if there is a combined limit for Coverages 2 and 3. Paragraph 5. below addresses how to determine combined limits losses.

4. Coverage 3–Increased Cost of Construction (Separate Limit)

This paragraph applies only if this coverage's limit is not combined with Coverage 2.

a. The insurance company does not pay anything until the property is actually repaired or replaced. The repair and/or replacement can be at the existing location or at another location. The building, rebuilding, and/or repairs must be completed within two years of the date of loss or as soon as reasonably possible, whichever is sooner.

Note: The insurance company has the option to extend the two-year time period but must do so in writing. This means that a statement by a claims adjustor "not to worry about the time” does not extend the time period.

b. The decision to repair or replace at the same location or at another location does not affect the maximum amount of the loss payment. The most paid is the lesser of the Coverage 3 limit of insurance on the endorsement schedule or the increased cost of construction that would have been incurred at the original location.

c. When the ordinance or law requires rebuilding the building at a different location, the most the insurance company pays is the lesser of the Coverage 3 limit of insurance on the endorsement schedule or the increased cost of construction at the new location.

5. Combined Limit–Coverage 2 and Coverage 3

When there is a combined limit for Coverage 2 and Coverage 3, the separate limit analyses for Coverage 2. and Coverage 3. do not apply. The most the insurance company pays is the combined limit of insurance on the endorsement schedule subject to the following:

a. The company does not pay more under Coverage 2, Demolition than the amount the named insured actually spends to demolish and clear the site at the affected location.

b. For Increased Cost of Construction:

(1) The insurance company does not pay anything until the property is actually repaired or replaced. The repair and/or replacement can be at the existing location or another location. In either case, the building, rebuilding, and/or repairs must be completed within two years of the date of loss or as soon as reasonably possible, whichever is sooner.

Note: The insurance company has the option to extend the two-year time period and must do so in writing. This means that a statement by a claims adjustor "not to worry about the time” does not extend the time period.

(2) When the named insured has the option to rebuild at the current premises or at another, the most the insurance company pays is the amount the increased cost of construction would be at the same location.

(3) If the ordinance or law requires relocating the building to a different location, the most the insurance company pays is the increased cost of construction at the new location.

Note: Any ordinance or law that requires relocation must be considered carefully. The named insured usually knows that damage to its property beyond a certain amount prohibits rebuilding at the same location due to current zoning laws. In those cases, the limit the named insured selects for this coverage must be adequate to pay the cost of building at a new site as well as meeting current code requirements.

F. Terms

This section states that this endorsement's terms apply separately to each building on the endorsement schedule.

G. Exclusion

Coverage does not apply if, prior to the loss, the named insured was required to comply with a specific ordinance or law but failed to do so.

 

Example: Sarah's Sundries is cited because she has not complied with a building code’s requirements and must make substantial upgrades in order to be in compliance. Lightning strikes the building before she makes any upgrades and the resulting fire damages one wing of the building. This endorsement does not cover the required costs to comply with building codes that applied before the loss.

H. Apportionment

B. Application of Coverage above states that coverage applies for only a proportionate amount of the covered loss instead of the entire loss when part is covered and part is not. This entire section is an example of how to handle such losses.

I. Business Income and Extra Expense Optional Coverage

This coverage is not automatic. The endorsement schedule must have a "Yes" entry for Business Income and Extra Expense Coverage in order for coverage to apply. A "No" entry is needed if coverage does not apply. These entries eliminate any confusion with respect to whether or not coverage is provided.

1. This coverage applies only if a covered cause of loss damages covered property. This coverage then extends the business income and extra expense coverage to include the increased period that operations are suspended because of complying with an ordinance or law. The law or ordinance must be in force at the time of loss and must regulate construction or repair of property. It also must require tearing down parts of a property that the covered cause of loss did not damage.

Note: “Complying with” as stated above replaces “enforcement of” in the 01 06 edition.

However, this is not pollution coverage. There is no coverage for any costs that an ordinance or law requires or that any insured or others incur to address, respond to, or assess the effects of pollutants, fungi, wet rot, or dry rot in any way.

2. This section defines period of restoration.

a. For Business Income Coverage, it begins 72 hours after the time that the direct physical damage occurs.

Note: A different waiting period can be selected by making the appropriate entry on the endorsement schedule.

For Extra Expense Coverage, it begins immediately after the time that the direct physical damage occurs.

b. For both coverages, it ends on the earlier of the date the property should have been repaired or replaced with similar quality using reasonable speed or the date the business actually resumed operations at a new permanent location.

The period of restoration includes any additional amount of time required to comply with the minimum standards of the ordinance or law that regulates construction, repair, or demolition of the property.

Note: The expiration date does not affect the period of restoration.