1. Forms
2. CP
3. CP-01-40

Ordinance Or Law Coverage - CP 01 40

1. What the form is

The Ordinance Or Law Coverage endorsement, CP 01 40, is designed to address coverage gaps in the standard Commercial Property policy (like the CP 00 10 Building and Personal Property Coverage Form) that arise from the enforcement of ordinances or laws affecting the repair or reconstruction of damaged buildings. Standard property policies typically limit payment to the cost of repairing or replacing only the damaged portion of the property with materials of like kind and quality, and may offer only a minimal amount (e.g., $10,000 or 5% of the building limit) for increased costs due to ordinances or laws. This endorsement provides crucial additional coverages, which are typically broken down into three parts:

• Coverage A - Loss to the Undamaged Portion of the Building: Covers the value of the undamaged portion of a building that must be demolished due to the enforcement of a building ordinance or law. For example, if a law requires a whole building to be torn down if more than 50% is damaged, and a fire damages 60%, this coverage would respond to the loss of the "undamaged" 40%.
• Coverage B - Demolition Cost: Covers the cost to demolish and clear the site of the undamaged portion of the building when demolition is required by an ordinance or law.
• Coverage C - Increased Cost of Construction: Covers the increased expenses to repair or reconstruct the damaged property to meet current building codes or ordinances, which may require more expensive materials or construction methods than were originally used. This can include upgrades like installing sprinkler systems or meeting ADA compliance requirements.

2. Classes of business it applies to

This endorsement is vital for owners of older buildings that are more likely to be non-compliant with current, stricter building codes. Specific classes of business that should strongly consider this coverage include:

• Owners of older commercial buildings: Including office buildings, retail stores, manufacturing facilities, and warehouses, especially those built before modern building codes were enacted. For instance, a 50-year-old downtown retail building that suffers a partial fire loss may be required to upgrade its entire electrical and plumbing systems to current codes during repair, costs not fully covered by an unendorsed policy.
• Businesses in areas with stringent or frequently updated building codes: Municipalities in coastal regions (e.g., Florida with its roof replacement codes) or earthquake-prone zones often have demanding building standards. A restaurant in such an area, if damaged by a covered peril, might face substantial costs to rebuild to new wind-resistance or seismic standards.
• Properties with unique or specialized construction: Historic buildings or those with grandfathered, non-conforming uses may face significant challenges and expenses to rebuild or repair in compliance with current laws if damaged.
• Landlords and tenants with significant investments in improvements and betterments: Depending on lease terms, either party may bear the financial burden of code-mandated upgrades after a loss.

3. Special considerations

• Triggering Coverage: The coverage is triggered only when direct physical loss or damage to the property by a covered cause of loss results in the enforcement of an ordinance or law.
• Limits of Insurance: Coverages B and C typically require separate limits to be selected by the insured. Coverage A is often included within the building limit of insurance specified in the declarations and does not increase that limit. It's crucial to select adequate limits for B and C, as these costs can be substantial. For example, underestimating demolition costs (Coverage B) for a large, older structure could leave the insured with significant out-of-pocket expenses.
• Timing of Repairs/Reconstruction: Coverage C often stipulates that the insurer will not pay for the increased cost of construction until the property is actually repaired or replaced. There may also be a time limit, such as two years, to complete the rebuilding.
• Coinsurance: While Coinsurance typically doesn't apply to Coverages B and C, ensuring the building itself (and thus Coverage A) is insured to value (often 100% of replacement cost) is critical to avoid penalties and ensure sufficient funds for the undamaged portion.
• Excluded Costs: The endorsement generally covers the minimum requirements of the ordinance or law; costs for recommended actions or standards exceeding actual requirements are usually not covered. Also, costs associated with pollution, asbestos removal (unless part of the covered demolition), or other specifically excluded items in the main policy or by law may not be covered.
• Relation to CP 00 10: The Building and Personal Property Coverage Form (CP 00 10) provides a very limited amount for "Increased Cost of Construction" (e.g., $10,000 or 5% of the building limit, whichever is less). The CP 01 40 (or similar Ordinance or Law endorsements like CP 04 05) is necessary to provide more comprehensive coverage for these exposures.

4. Key information for agents and underwriters

• Risk Assessment: Key factors include the age of the building, the type of construction, the local building code environment (how often codes are updated and how stringently they are enforced), and the occupancy of the building. Older buildings in areas with rapidly evolving codes present higher risks.
• Pricing: Premiums will reflect the limits chosen for Coverages B and C, as well as the assessed risk. Higher limits and older, more complex buildings will command higher premiums.
• Coverage Gaps: Agents should highlight the significant gap left by an unendorsed property policy regarding code compliance. Explain that "replacement cost" in the base policy doesn't mean replacing with a building that meets all current codes if those codes require upgrades beyond what was originally there. Real-world examples of local code enforcement after a partial loss can be very effective in demonstrating the need.
• Underwriting Guidelines: Underwriters will scrutinize the age and condition of the property. They may require inspections for older buildings. Understanding the specific ordinances in the building's jurisdiction is crucial. For example, some jurisdictions may have "50% rules" (if over 50% damaged, the entire structure must be brought to code or demolished). The underwriter needs to assess the probability of such a scenario.
• Limit Adequacy: Agents must guide clients in selecting appropriate limits for Coverages B and C. For Coverage B (Demolition), consider local demolition costs per square foot and the potential size of the undamaged portion that might need removal. For Coverage C (Increased Cost of Construction), consider the age of the building and the extent of likely required upgrades (e.g., electrical, plumbing, HVAC, accessibility, energy efficiency). It's often an "educated guess," but crucial for financial recovery.
• Loss Scenarios: Discuss potential loss scenarios, such as a partial fire requiring the demolition of the remainder of the building due to local ordinances, or the need to install an expensive fire suppression system in the entire building during reconstruction even if only a portion was damaged.