Building Ordinance Insurance for Massachusetts Property Owners

September 13, 2018

building ordinance insurance helps protect property ownersDo you have Building Ordinance Insurance a.k.a. Ordinance or Law Coverage for your property? If you’re not sure, it’s a good question to ask your Massachusetts insurance agency. Here’s why…

Imagine a fire breaks out in your company building. Half of the building is destroyed. Your contractor informs you that repairing the structural and cosmetic damage will add up to $250,000. But that’s not all.

The town says that because most of the building is now ruined, the entire property needs to be demolished, and then rebuilt—rebuilt to comply with all current building codes: approved plumbing, fire safety systems, revamped wiring, HVAC, handicap accessibility, etc.

Luckily, you have commercial property insurance, so you’re not too concerned. The insurance company will write you a check, and soon enough you’ll be back in business… Right?

Errr, not so fast.

Standard commercial property insurance is only designed to restore your building to its former state. Most standard policies exclude costs like the updating mentioned above. Specifically, standard coverage excludes the increased cost of “rebuilding, repairing, or remodeling that is created by the application of local, state or federal building codes.”

Your standard commercial policy might cover the $250,000 for the repairs to the damaged half. But what about the other half that is otherwise intact? Who will pay to tear your building down? Who will pay to rebuild the good half? And who will pay for all those modifications that aren’t factored into the property’s replacement cost value?

Before you get a headache, let’s take a step back and look at the commercial coverage that would help you avoid the obvious gaps in this example.

What is Building Ordinance Insurance?

Also known as Ordinance or Law Coverage, Building Ordinance Insurance protects you against losses caused by the enforcement of any ordinances or laws that regulate the construction and repair of damaged buildings. In other words, these are costs that wouldn’t apply if you were just repairing your property to its former state, but that you do have to pay in order to be compliant with current building codes.

There are three types of losses that can fall under this coverage heading. Each type needs to be written with its own monetary value or limit:

Coverage A: Coverage for the Loss of the Undamaged Portion of the Building

After a fire or a hurricane, if there are undamaged portions of your building that you can no longer use (and have to tear down), this is the coverage that kicks in to address that part of your loss.

Coverage B: Coverage for the Cost of Demolition

This is the coverage that pays for the demolition and debris removal itself—an expensive project, especially if there are special hazards or decontamination projects involved, like asbestos removal or other pollutants.

Coverage C: Coverage for Increased Construction Costs

This is the coverage that addresses the costs needed to make your building compliant with current codes. It’s not an easy number to pin down prior to a loss event, both because it requires an in-depth knowledge of how “outdated” your building is and a keen familiarity with current building codes. It’s also an amount that should be revisited regularly, as state and local codes can change frequently.

What’s the difference between Building Ordinance coverage and “Replacement Cost” property insurance? I thought I was already insured for full replacement costs?

Your property may be insured for “full replacement cost” or even “guaranteed replacement cost,” but these coverages are only designed to replace whatever was there prior to the loss event. Replacement cost insurance will not bridge the gap between the cost of replacing old materials/systems, and the cost of rebuilding with (different) compliant materials/systems. It also will not pay for demolition or the replacement of undamaged property.

Who needs Building Ordinance Insurance?

If you own commercial property, it makes sense to at least ask about adding this endorsement. Thousands of fires happen each year. For Massachusetts alone, roughly 2,600 commercial building fires were reported in one year, according to MFIRS’ 2014 Executive Summary.

Your agent can get you a quote and help you run cost/benefit numbers. Don’t assume your building is up-to-code simply because it was built within the last twenty or thirty years. Plenty of state and local building code changes have been promulgated since the 1980’s and 1990’s.

When will I use Building Ordinance Insurance?

Hopefully, never. Not every claim filed on your property insurance will trigger this coverage. And it can’t be used as an “update your antiquated systems for free” card, any time you experience a loss event. Instead, the following criteria need to be met:

  • The loss event must be a “covered peril” under your commercial property coverage. A fire, for example, is a covered peril. Ditto for burst pipes, windstorms, snowstorms, and explosions. Floods and earthquakes aren’t typically included on this list. AND…
  • The damaged area must involve the materials/systems that need to be made compliant with current building code. OR…
  • Your town or city must determine that the building is damaged past the point of safe repair (usually 50% damaged). In this case, the whole structure would need to be torn down and rebuilt in compliance with all current building codes.

How much Building Ordinance Insurance do I need?

It’s best to work with an agent who understands local commercial property, local construction costs, and local building codes. Be sure your agent has been working in the area for a significant number of years.

What does Building Ordinance/Ordinance or Law coverage cost?

Many different variables affect the cost. Some carriers add this coverage as a property insurance enhancement. Others may require a separate policy. Your best bet is to call us for a personalized quote: 508.339.2951.

Do homeowners need Building Ordinance Insurance, just like commercial property owners?

Yes! The same problem that can affect business owners can also affect homeowners. If your home is seriously damaged in a fire or storm, your town may require a complete tear-down and rebuild. Even if your MA home insurance is a “guaranteed replacement cost policy,” you could be stuck with the bill for demolition and other building-code-compliance costs. If you own an older home, especially, you may want to discuss Ordinance or Law coverage with your insurance agent.