When climbing, you don’t just plan the best way up the mountain. You also have to plan the way back down.

People who are shopping for the right property insurance policy have a tendency to focus on the immediate property that can be lost. It seems natural, after all.

If there’s a fire, how much stuff could I lose? What’s the value of the building itself? How much income would I lose if my building was shut down for 6 months?

Obviously these are important questions which address some major issues. The problem is that they’re not the only issues that you’ll need to anticipate, they’re just the first ones. (You’ve only planned for your way up the mountain.)

Here’s the other half of what you should be asking:

  • What about the portion of the building that wasn’t damaged by fire? What does my policy do if the city tells me I need to demolish the whole structure?
  • Do I have to pay to demolish my own building when the government is forcing me to do it?
  • My building was constructed in 1993 before the local building codes went into effect. The insurance company will account for that, right?

If you have an off-the-shelf commercial property insurance policy, you’re probably not going to like the answers to these questions.

For example, you could end up paying an additional 50% or more beyond what the insurance company already paid out. That’s just to bring the rebuilding into compliance with local laws and ordinances.

Many of these expenses can be pushed off onto an insurance company. You just need to purchase the right insurance policy with an ordinance or law coverage extension. (You’ve planned your way back down the mountain to safety. Yay!) 

Let’s take a look at the three parts of ordinance or law coverage. Why is adding this enhancement to your policy so important for managing risk?


Coverage A: Coverage for loss to the undamaged portion of the building

All property insurance will pay for that portion of covered property that has been destroyed by a covered peril. Let’s use a wall as an example of covered property and a fire as an example of a covered peril.

According to the off-the-shelf property insurance policy, if a fire destroys 75% of a wall then there has only been damage to 75% of that covered property. Therefore, only the costs required to replace 75% of the wall will be paid out…

Kinda messed up, no? 

They’re only offering to rebuild three quarters of a wall which, using common sense, should be replaced completely by insurance. You don’t repair after a fire by just carving out the burnt pieces of wall and filling in the gaps. You replace the whole wall!

We get around this pitfall by adding ordinance or law Coverage A.

This additional coverage is provided without the need to specify the limit (unlike the other two coverages we’ll get to shortly). If you’re forced to demolish the undamaged portion of your building, having Coverage A in place means that the insurance company will treat that 25% of wall that’s still standing as if it too was damaged.

That way you can be confident that as long as you’ve selected adequate limits in insuring your building as a whole, your policy should get you back on your feet without having to worry about an ordinance or law exclusion getting in your way.


Coverage B: Demolition cost coverage

Let’s go back to the wall example. Imagine a local law or ordinance is requiring you to demolish that undamaged 25% of the wall. Depending on the type of building, the amount of damage, and the presence of pollutants (such as asbestos, among others) your demolition costs could get out of hand quickly.

Your insurance policy should reduce that risk. We do this by making sure ordinance or law Coverage B is included in the policy. It pays a specified limit to cover the demolition of the undamaged portion of property that you’re required to remove.

That way, you won’t have to pay 25% of the demolition company’s fee yourself simply because firefighters did their job. (Gone are the days of greasing palms at the firehouse to make sure they let your whole building burn down!)


Coverage C: Increased cost of construction coverage

This is a particularly important piece of the ordinance or law coverage extension. It’s also a tricky one. Coverage C will pay the cost of updating your property to comply with local ordinances or laws following a covered loss.

What makes it tricky? Not only is the exposure specific to your building, it also requires consideration of what the your local government is allowed to order you to do. This is one of the many reasons it’s so important to work with qualified insurance professionals (nudge, nudge).

Let’s pause for an important definition: replacement cost valuation. This is one of the methods an insurance company can use to determine how much they’ll pay you if your covered property is damaged or destroyed.

A policy with replacement cost valuation will pay for replacement property that is of “like kind and quality.” (The alternative would be an “actual cash value” policy which factors in depreciation. You don’t want that). Notice that the phrase “like kind and quality” makes no mention of the additional costs required to comply with local laws or ordinances.

Say, for instance, you have a $1,000,000 property insurance policy covering your $1,000,000 building. It sounds like a good policy and it should be! But without ordinance or law Coverage C, the only property the insurance company would pay for is the equivalent to whatever existed before the fire.

If you are required to:

  • rebuild with fire-resistive materials where you had joisted masonry, or
  • implement full ADA compliance where you only had a few accessibility features, or
  • redesign to meet certain earthquake standards

…those costs would have to come out of your pocket.


Wrapping it up

Put these pieces together and you’ll have a comprehensive risk management plan that will help you deal with the surprise costs that pop up after a major property loss.

Avoid the temptation to over-weight the importance of the obvious risks over the more obscure ones. If you’re dealing with a major fire (or tornado or earthquake), you have a massive project ahead of you. There are a million problems, big and small, that you’ll be faced with. And the last thing on your mind will be “hey, wait, does my commercial property insurance contemplate updates to local zoning laws?”

No, chances are your reaction will be something like this.

The trick is to think about the whole risk (remember: up the mountain and back down again) before you reach that point of no return. Adding ordinance or law coverages A, B and C to your commercial property insurance policy is a solid place to start.

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