Local Governments Increase Homeowners Loss

By | November 2, 2008

Personal Lines Ordinance or Law Exposures

Within 10 years of completion (sometimes in as little as five) a house may violate several parts of a community’s most current building codes. Specific jurisdictional ordinances and laws stipulate the point: at which a particular house has suffered “major” damage, is too far out of code, cannot be repaired and must instead be torn down and entirely rebuilt in compliance with current building codes. Essentially, such an application of a local ordinance or law creates a total loss, even when the house was only partially damaged by the covered cause of loss.

The 2000 edition of Insurance Services Office’s (ISO) HO-3 specifically states, “In this Condition C., the terms ‘cost to repair or replace’ and ‘replacement cost’ do not include the increased costs incurred to comply with the enforcement of any ordinance or law, except to the extent that coverage for these increased costs is provided in E.11. Ordinance Or Law under Section I — Property Coverages.” Additional costs created by the enforcement of an ordinance or law are specifically excluded except for the minimal coverage amount given back by “E.11. Additional Coverage — Ordinance or Law” or increased by endorsement.

“E.11. Additional Coverage – Ordinance or Law” extends only 10 percent of the dwelling amount, as an additional amount of coverage, to pay for the increased amount of loss associated with the enforcement of any ordinance or law following a “major” loss. Only 10 percent of Coverage “A” is available to pay: 1) The increased cost necessary to bring the damaged part of the house up to current code; 2) The cost to tear down and remove the debris of the undamaged part of the structure; and 3) The cost to rebuild or repair the undamaged part of the structure in compliance with current building code.

Replacement Cost vs. The Government

Replacement cost means to replace with “like kind and quality.” Translated this means, “to put back exactly what was there, like it was, using new material but excluding the cost of any upgrades mandated by any governmental authority.”

The definition of replacement cost does not include the cost to:

  • Raise the house two feet to get it above base flood elevation in order to comply with the current flood plain management requirements;
  • Add more electrical outlets to meet national electric code requirements;
  • Move the house back 10 feet to meet set-back requirements; or
  • Widen doorways and raise counters to meet the Americans with Disabilities Act requirements.

These costs result from the application of governmental ordinances or laws and are examples of expenses covered under the “E.11.” additional coverage but not included in the definition of replacement cost. That’s a lot to expect from such a minimal amount.

The difference between the cost of rebuilding the structure as it stood and the cost to bring it into compliance with the current building code is largely a function of the house’s age and the rapidity and breadth of changes in the building codes.

Defining Major Loss or Damage

Each state has codified its own definition of and application of major damage. Two broad categories of “major” damage/loss have evolved into which most state and local building code enforcement falls:

  • The Jurisdictional Authority Rule: States applying this measure of major damage allow the authority having jurisdiction (the local government) to judge at what point a damaged building must be brought entirely into compliance with the current building code; and
  • The Percentage Rule: Simply, when a building is damaged beyond a certain percentage of its “value,” the entire structure must be brought into compliance with current building code.

Jurisdictional authority rules are, by their nature, subjective. Each jurisdictional authority state applies its own standard of major damage to determine a structure’s continued fitness for use. Decisions can be based on the amount of damage, the age of the building coupled with pre-loss compliance shortfalls or simple safety concerns. There is no one criteria upon which homeowners and their agents can depend.

The percentage rule’s problem is that “value” is not consistently defined among the states that have codified this rule.

Ordinance or Law Sources

Building ordinances and laws, although enforced by local jurisdictions, are promulgated by a wide assortment of contributors. States use these model codes to create a statutory infrastructure which the local jurisdictions customize as necessary to meet local needs. Building codes and ordinances are developed and published by: the federal government; advisory organizations; state and local government; and historical societies.

The good news is that ordinance or law coverage responds to all building codes, regardless of their genesis. Policy wording specifically states, “You may use up to 10 percent of the limit of liability that applies to Coverage A for the increased costs you incur due to the enforcement of any ordinance or law which requires or regulates….”

Ordinance or Law Endorsements

Two ordinance or law endorsements are available for use with homeowners’ policies: 1) the Ordinance or Law Increased Amount of Coverage (HO 04 77) endorsement; and 2) the Ordinance or Law Coverage (HO 05 62) endorsement.

The HO 05 62 is utilized when there is no automatic ordinance or law coverage provided by the homeowners’ form. Coverage provided by this endorsement is the same as has been discussed, except that the insured chooses the coverage limit desired.

Since the 2000 edition of ISO’s homeowners’ form already includes some ordinance or law coverage, the most commonly used ordinance or law endorsement is the HO 04 77 (or applicable state-specific form). Coverage breadth is not changed by the HO 04 77 (Ordinance or Law Increased Amount of Coverage), only the amount of coverage. The insured can choose to increase the limits from the standard 10 percent to 25 percent, 50 percent to 75 percent or even 100 percent of Coverage “A.” The premiums for each level is a percentage of the homeowners’ base premium ranging from 13 percent (to increase to 25 percent of “A”) up to 67 percent (raising the limit to 100 percent of Coverage “A”). Some states, Florida being one, require agents to offer the 25 percent and 50 percent alternatives to every homeowner client. The insured has the option to purchase or reject the coverage offer (by signature).


Ordinance or law coverage is rarely discussed with personal lines clients. Missing or not having enough ordinance or law protection can be costly for the insured and a real-world errors and omissions exposure for the agent.

Without being overly dramatic, ordinance or law is a very real homeowners exposure often overlooked during the personal lines risk management and insurance planning process.

Agents should offer the protection and explain the exposure as clearly and quickly as possible, especially to clients in a home 10 years old and older. A more detailed explanation can be found in the “Articles” section at www.mynewmarkets.com.

About Christopher J. Boggs

Christopher J. Boggs joined the insurance industry in 1990. He is currently the Executive Director, Big I Virtual University and former Vice President of Education for Insurance Journal's Academy of Insurance. More from Christopher J. Boggs

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