19 May Ordinance and Law – Is This Coverage Getting the Attention It Deserves?
Suggestion: At an upcoming staff meeting, ask one of the staff to explain Ordinance and Law coverage. Quite candidly, there is a possibility they may struggle with this explanation.
Ordinance and Law coverage is somewhat unique and can have some tremendous importance at the time of a loss. While this coverage is typically included on most homeowners policies, the standard coverage is usually 10 percent of the coverage A limit with higher percentage limits available for an additional premium.
What is Ordinance and Law coverage? Basically, it includes three separate types of coverage:
- Coverage for Loss to the Undamaged Portion of the Building: In some jurisdictions, the code may require that a partially damaged building be demolished. In such cases, this coverage states that if such ordinance is in place and is enforced by the local authorities, the insurance policy will treat the claim as a total loss even though the building was only partially damaged.
- Increased Demolition Cost: Pays for the cost of demolition of the undamaged portions of the building.
- Increased Cost of Construction: Pays for any increased expenses incurred to upgrade, repair, or replace the building with one conforming to the current building laws or ordinances.
Ordinance and Law coverage pays not only for rebuilding a destroyed home but also upgrading the home so that it will meet the current building codes. Without Ordinance and Law coverage, the additional costs associated with these issues would not be covered. Here is a claim example to illustrate the issue.
After the client suffered hail damage to their roof, it was determined the building code had changed and required the client to add a membrane coating under the roof. The client was seeking $100,000 under the Ordinance and Law coverage, far more than the $10,000 actual policy limit. The client sued for the additional $90,000, alleging the agency failed to procure the necessary coverage. It was also alleged that the agent did not help the client understand the coverage and options available. Clearly, the lack of understanding of the coverage was a material issue in a problem developing and an E&O being brought against the agency. At a minimum, the agency should make the client aware of what the coverage provides and the limits available.
It is interesting to note that some agency staff may believe this coverage is only for older homes, and it’s not an area of concern regarding homes built in the last 30 years. This is totally untrue. There is certainly the possibility that homes built 10 years ago could have this exposure if the municipality where the client resides has undergone some type of a code change.
Agencies should consider some initiatives for this coverage to get the necessary attention. A good starting point is for the agency staff (personal and commercial) to be provided the necessary training to ensure they understand the coverage and know how to communicate and explain it. In addition, all proposals should include reference to this coverage and the additional limits available for purchase. There should obviously be clear documentation of the decision made by the client with the proper sign offs.
Also, when moving coverage from one carrier to another, Ordinance and Law coverage should be part of the checklist to ensure the client is getting at least the same limits of coverage they had with their prior carrier.
Typically, when discussing homeowners coverage, the more prominent perils (fire, theft, etc.) are discussed. Agencies would be wise to give Ordinance and Law coverage the attention it deserves.