FRIDAY, OCTOBER 21, 2011
by Ed Sneneh, Illinois Property Insurance Expert in Chicago
Insurance Navy, 300 N LaSalle, Ste 4925 Chicago, IL 60654
What is Ordinance of Law Coverage and Exclusion?
When people lose their property they assume that the insurance company will pay whatever it takes to replace their lost property. This may not be true if the property is insured under the Actual Cash Value (ACV) method. If the base of insurance is Replacement Cost then the company will pay whatever it takes to replace the damaged property. In the Actual Cash Value approach, the AVC is calculated as Replacement Cost minus Depreciation on the property. Property Depreciation is the loss in the value of the property (building, business property, fixtures, etc.) over time due to wear and tear or due to the deterioration of the physical conditions or age, or any combination of those.
Regardless whether the property insurance is based on ACV or Replacement Cost, the insurance company replacement value doesn’t mean upgrade cost. Almost all property insurance contracts typically have a general exclusion called 'Ordinance of Law' exclusion. Ordinance of Law exclusion means that the property insurance contract covers the structure of the building and it does not cover the cost to improve the building to current legal statutes and ordinances of laws after a specific property loss.
Examples of Ordinance of Law: A municipality may change its ordinance for new single family construction in certain subdivisions to be 3,000 square feet or larger, or to have a fully automatic sprinkler system for any newly constructed strip malls over 10,000 square feet. An insurance company may be facing significantly larger exposure when it insures a single family house of 1,000 square foot in that subdivision, or a non-sprinkled strip mall in that municipality. In the event of total loss for either property the amount needed to rebuild the house or the strip mall will be significantly higher than the replacement cost of the original structures.
Ordinance of Law is one of the major terms in property insurance. Some insurance specialists think that ordinance of law is a peril because of the fact that the law (or ordinance) is what is going to cause the financial loss to the company. Others think that Ordinance of Law is a hazard because the state of being 'out of code' enhances the amount of loss and the probability that a peril will take place.
Many people think that this coverage is valuable for owners of older buildings. This belief is not necessarily true. Construction and zoning laws and ordinances do frequently change and their changes apply equally to old and new buildings. For that reason, the coverage is important to have for all properties.
Ordinance of law coverage will allow you to extend your protection to the undamaged portion of the property in case of fire or any other loss, where the undamaged portion needs to be brought up to the legal codes. Bringing up the undamaged portion of the property may actually require demolition of the undamaged property or its upgrade, things that are not covered if the Ordinance of Law coverage is not included. Also, additional features like sprinkler systems, elevators, wiring, plumbing and septic systems, that were not present in the old construction but must be included now will all be covered.