Ordinance and law coverage (O&L), might be one of the single most important coverages a building owner can have in their commercial insurance portfolio, and surprisingly, most have never heard of it. O&L coverage provides for the loss caused by enforcement of city ordinances as they relate to buildings after a loss.
The coverage comes in three parts, referred to as either part A, B, or C:
Loss to the Undamaged Portion of the Building
Total building losses do not happen often. It’s much more likely that a portion of the building will be damaged. However, when this happens, a local official may not allow the building to simply be repaired back to its pre-loss condition. Ensuring your building has O&L coverage A provides for the full limits of the building to be available for rebuild.
Once local officials have stepped in and determined that a building will need to be completely torn down due to a partial loss, it’s time to rebuild. However, an unendorsed commercial property policy does not typically provide an allowance for those demolition or debris removal costs. Coverage B can provide limits dedicated to the demolition of the building and removal of its debris.
Increased Cost of Construction
Over time, buildings can become out of code. Something that was acceptable in the 1970s may not be acceptable today due to advances in technology or known prior construction method deficiencies. A local official may require that certain aspects of the building be brought up to code before final occupancy is granted back to a building owner after a loss. Coverage C provides limits for those code upgrades, and in some cases, can provide coverage for a construction issue that isn’t really “code” but is being required by a local official.
Consider the following claims example:
An older building was up to code at the time of its original construction. However, over time, the construction method used on the building had proven not to stand up to modern day weather patterns and stress. The eventual outcome was that the building succumbed to the fate of many other buildings like it and failed. The failure was in only part of the building, but because of the known construction defect in the jurisdiction, local officials determined that all of the building would need to be retrofitted, not just the portion that had failed. This six figure cost was not covered by the insurance company because O&L coverage had not been purchased.
This is just a sample of a situation in which O&L coverage would be necessary. Over time many building systems such as plumbing, electrical, and heating/cooling can become out of date and the costs to replace the systems can grow quickly. Additionally, changing legislation such as the Americans With Disabilities Act of 1990 can create a need for O&L coverage by requiring a property is rebuilt in such a way that it is made accessible for all.
While most policies do provide for some O&L coverage, it’s important to take a hard look at the specific building you need to insure, the age, and the potential costs in your area to update certain systems.
If you’re unsure of your current ordinance and law coverage or unsure if the coverage you have is enough, please give us a call for a no obligation review today.
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