1. Forms
2. HO
3. HO-04-77

What the form is

The HO 04 77, titled "Ordinance Or Law Increased Amount Of Coverage," is an endorsement to a homeowners insurance policy. Its primary purpose is to increase the amount of coverage available for increased costs incurred by the insured to comply with the enforcement of any ordinance or law that regulates the construction, repair, or demolition of a building following a covered loss. Standard homeowners policies often include a basic limit for this coverage (commonly 10% of the Coverage A - Dwelling limit), which may be insufficient to cover the actual expenses. This endorsement allows the policyholder to select a higher percentage of Coverage A, such as 25%, 50%, or even 100% or more, to address these potential costs.

Classes of business it applies to

This endorsement is used with various standard homeowners insurance forms, including:

• HO 00 02 (Broad Form)
• HO 00 03 (Special Form)
• HO 00 04 (Contents Broad Form) - where it applies to Building Additions and Alterations.
• HO 00 05 (Comprehensive Form)
• HO 00 06 (Unit-Owners Form) - where it applies to Additional Coverage 10.

It is particularly relevant for owners of older homes, as these properties are more likely to require significant upgrades to meet current building codes if they suffer a major loss. It's also important in areas with stringent and frequently updated building codes. For example, if a 50-year-old home is significantly damaged by fire, current building codes might require upgraded electrical, plumbing, and structural components throughout the repaired or rebuilt sections, even in parts of the house not directly damaged by the fire. The HO 04 77 can help cover these increased costs.

Special considerations

There are several important points to consider regarding the HO 04 77 endorsement:

• Increased Limit, Not Broadened Coverage: This endorsement increases the amount of coverage for ordinance or law losses; it does not change the types of ordinance or law situations covered by the underlying policy.
• Three Components of Coverage: Ordinance or Law coverage typically addresses three types of costs: (1) the cost to repair or rebuild the damaged portion of the structure to meet current codes; (2) the cost to demolish and remove the undamaged portion of the structure if required by law; and (3) the increased cost of construction for the undamaged portion if it must be rebuilt to comply with codes. The base policy limit (e.g., 10% of Coverage A) applies to all these costs combined, which can be easily exhausted.
• Valuation: Loss settlement under this coverage is based on the increased costs necessary to comply with the ordinance or law.
• Trigger: The coverage is triggered by the enforcement of an ordinance or law after a covered peril damages the insured property.

For instance, if a local ordinance requires that any roof repair exceeding 50% of the roof surface must bring the entire roof up to current code, and a hailstorm damages 60% of an older roof, this endorsement would help cover the additional cost of replacing the undamaged 40% to meet the new code, beyond what the standard policy might cover.

Key information for agents and underwriters

For Agents:

• Client Needs Assessment: Agents should proactively discuss this coverage with clients, especially those with older homes or homes in areas known for strict code enforcement or frequent code updates. Explain the potential for significant out-of-pocket expenses if the basic ordinance or law coverage is insufficient.
• Offer Options: Present various increased limit options (e.g., 25%, 50%, 100% of Coverage A) and explain the relatively modest premium increase for substantial additional protection.
• Documentation: It's good practice to document that this coverage was offered and whether the client accepted or declined it.

For Underwriters:

• Risk Assessment: The age of the home is a primary factor. Older homes generally present a higher risk for ordinance or law claims. The specific building codes and their enforcement level in the property's jurisdiction are also crucial.
• Pricing: While the endorsement is often relatively inexpensive, pricing should reflect the increased exposure, considering the Coverage A limit and the selected percentage increase.
• Coverage A Adequacy: Ensure the base Coverage A limit accurately reflects the home's replacement cost, as the Ordinance or Law Increased Amount is a percentage of this limit. An inadequate Coverage A will also result in inadequate ordinance or law coverage.