Ordinance or Law: Where to Turn for Information?

Q: Where can I find definitions of local ordinance and law to share with an insured who is a commercial property owner?

Response 1: The International Risk Management Institute has a free online glossary. It’s open to everyone and no subscription is necessary.

Other internet sources provide similar definitions, but to understand how local ordinances apply to a specific property, the owner may need to consult with an architect and contractor to learn what is required under current ordinance and law. Bear in mind that the regulations could change again at any time in the future. 

Response 2: The policy is one source of this information. Also, the FC&S Bulletins from the National Underwriter cover the subject. Often, carriers provide relevant materials, too.

Response 3: An Ordinance or Law endorsement allows the building to be rebuilt in compliance with current building codes following a “major loss.” Undoubtedly, your insured will ask, “You said I have replacement cost—doesn’t that pay these additional costs?” You will have to explain, no, replacement cost only pays to put back what was there at the time of the loss. In order to secure coverage for the additional costs of complying with building codes, they need the Ordinance or Law endorsement.  

The second sticky conversation is explaining and defining what constitutes “major” damage. This varies depending on state law.

The Big “I” Virtual University has an on-demand webinar on this topic: Ordinance or Law – When (and Why) Partial Losses Become Total Losses.

Response 4: On ISO commercial property forms, the Exclusions section of the Causes of Loss forms define the terms as far as they relate to the insurance coverage. Proprietary forms many be formatted differently.

Response 5: City building code departments. However, building code personnel are seldom thinking in terms of insurance issues and may not provide the whole picture. It's also prudent to speak with property adjusters with experience in this area.

Response 6: IRMI defines “building ordinance coverage” as follows:

Coverage for loss caused by enforcement of ordinances or laws regulating construction and repair of damaged buildings. Older structures that are damaged may need upgraded electrical; heating, ventilating, and air-conditioning (HVAC); roofing materials; fences; and plumbing units based on city codes. Many communities have a building ordinance(s) requiring that a building that has been damaged to a specified extent (typically 50 percent) must be demolished and rebuilt in accordance with current building codes rather than simply repaired.

Unendorsed, standard commercial property insurance forms do not cover the loss of the undamaged portion of the building, the cost of demolishing that undamaged portion of the building, or the increased cost of rebuilding the entire structure in accordance with current building codes.

This definition is not exhaustive, however, because ordinances and laws vary by state. Land use changes, such as side and set-back requirements or flood zones, as well as state building codes, such as sprinkler system requirements, may all have an effect on the cost of rebuilding.

Response 7: Refer to this IA series on the topic, written by Chris Boggs, VU executive director:

These questions were originally submitted by agents through the VU’s Ask an Expert Service, with responses curated from multiple VU faculty members. Answers to other coverage questions are available on the VU website. If you need help accessing the website, request login information.