Building Ordinance Insurance for Massachusetts Property Owners
Do you have building ordinance insurance — also called ordinance or law coverage — for your property? If you’re not sure, it’s a good idea to find out. Here’s why…
Imagine a fire breaks out in your company’s office building; half of the structure 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 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?
Not so fast.
Standard commercial property insurance is only designed to restore your building to its former state, which is why most standard policies exclude costs like the updates 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.”
While your standard commercial policy might cover the $250,000 for the repairs to the damaged half of the building, what about the other half that is otherwise intact? Who will pay to tear your building down? Who will pay to rebuild the undamaged half? And who will pay for all those modifications that aren’t factored into the property’s replacement cost value?
That’s where ordinance or law coverage comes in.
But before you get a headache, let’s take a step back and look at how this type of coverage can help you avoid the obvious gaps in this example.
What Is Ordinance or Law Coverage?
This type of insurance coverage 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 the costs that come with repairing your property to a standard beyond its former state — one that complies with current building codes that weren’t a factor when the building was originally built.
There are three types of losses that can fall under this coverage heading, and each type needs to be written with its own monetary value or limit. Depending on your state, you may have the option to choose ordinance or law coverage limits as a percentage of your building’s insured value.
These loss types are:
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.
Why Ordinance or Law Coverage Is Important
No matter where your business is located, one thing is true: Building codes and regulations are in a near constant state of change. While these updates are essential for ensuring safety, efficiency, and sustainability, they can create unexpected financial burdens for property owners when repairs, renovations, or rebuilds are needed.
Without ordinance or law coverage, you may be on the hook for the often substantial costs of bringing a building up to current code after damage occurs. This can include structural upgrades, electrical or plumbing modifications, or even full demolition and rebuilding. While standard property insurance covers the cost of restoring a building to its previous condition, it doesn’t account for any mandatory code-related improvements.
Investing in ordinance or law insurance protects you from these often overlooked expenses and helps minimize the out-of-pocket costs that come with ensuring your rebuilt property remains code-compliant.
Benefits of Ordinance or Law Coverage
Ordinance or law coverage provides financial protection for property owners facing unexpected building code-related costs. Some additional benefits afforded by this type of policy include:
- Cost savings on required upgrades: When a property sustains damage, rebuilding or repairing it to meet the most recent building codes can be expensive. This coverage helps cover the costs of necessary improvements, preventing significant out-of-pocket expenses.
- Protection against partial or full demolition costs: If a damaged building is deemed to be beyond the point of safe repair, local regulations will require partial or complete demolition. Ordinance or law coverage helps cover these costs, too.
- Coverage for increased rebuilding expenses: Construction costs can rise when materials, labor, and design must align with modern safety and efficiency standards. This coverage helps absorb those additional expenses.
- Assurance against future code compliance costs: When a building sustains damage, the repairs must comply with current building codes, which usually means upgrade expenses. Ordinance or law coverage will help cover these costs, ensuring your property is code-compliant without the expense.
How to Choose Ordinance or Law Coverage
Selecting the right ordinance or law coverage requires careful evaluation of your property’s unique needs and potential risks. When determining the best coverage options, it’s important to consider the following:
- Your property’s age and condition: Older buildings are more likely to have outdated structures that don’t satisfy modern building code requirements. If yours is decades old, you may need higher coverage limits to account for necessary upgrades.
- Local building codes: These vary from location to location and are constantly changing. Research your area’s requirements to understand potential compliance costs in case of repairs or reconstruction.
- Coverage limits: Don’t forget that ordinance or law coverage is split into three parts — coverage for the loss of the undamaged portion of the building, coverage for the cost of demolition, and coverage for increased construction costs. Make sure your policy includes appropriate limits for each category to avoid gaps in protection.
- Future code changes: Even if your building is up to code right now, regulations will most certainly change over time. Choosing a policy with flexible or adjustable coverage limits can help protect against future compliance costs.
- Advice from an insurance professional: Every property is different, so speaking with an insurance expert can help you determine the amount of ordinance or law coverage you’ll need.
FAQs
Q: What’s the difference between ordinance or law coverage and “replacement cost” property insurance? I thought I was already insured for full replacement costs.
A: 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.
Q: Who needs ordinance or law coverage?
A: If you own commercial property, it makes sense to at least ask about adding this endorsement to your commercial property policy. 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 20 or 30 years. Plenty of state and local building code changes have been promulgated since the 1980s, 1990s, and 2000s.
Q: Do I need ordinance and law coverage in Massachusetts?
A: While this endorsement isn’t required by the state, it’s not a bad idea to add it to your property insurance policy — especially if your property is older. This is because older buildings will generally cost more to bring up to code in the event of damage.
Q: When will I use ordinance or law insurance?
A: 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, as are burst pipes, windstorms, snowstorms, and explosions. Floods and earthquakes aren’t typically included on this list.
- The damaged area must involve the materials/systems that need to be made compliant with current building codes. 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.
Q: How much ordinance or law insurance do I need?
A: 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.
Q: What does ordinance or law insurance cost?
A: Several variables will determine the final cost of your policy. Some carriers add this coverage as a property insurance enhancement while others may require a separate policy. Your best bet is to call us for a personalized quote: 508.618.5975.
Q: Do homeowners need ordinance and law coverage?
A: Yes! The same risks that threaten 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 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.
Protect Your Property With the Right Coverage
Ordinance or law coverage is a crucial addition to any property insurance policy, helping protect against the unexpected costs of complying with updated building codes after a covered loss. To learn more about how this coverage can benefit you, get in touch with the C&S team — we’re always happy to discuss your options and find the right coverage for your needs.