Few commercial structures fully meet the applicable jurisdictional building codes and regulations to which they are subject. This is true of the five year old hotel which no longer meets its city's recently updated fire protection code; or the 25-year-old office building that is deficient in meeting most, if not all, local building codes.

Federal, state and local building codes are routinely reviewed, revised and updated; usually the result of newly developed technology or advances in construction methodologies or materials. Broad, sweeping revisions are most often in response to a large-scale tragedy that resulted in a large amount of property damage, a massive amount of injuries and/or the loss of many lives. Some codes exist and change simply because of jurisdictional preference necessitated by the scarcity of some natural resources (such as water usage control requirements); or due to increased hazards faced in that locale (wind load and "earthquake proof" building requirements are examples).

Regardless of the source - federal, state or local - or the reason, all structures must be constructed to meet the building codes in force at the time of construction.

Without being too philosophic, the present becomes the past very quickly. The building that was in "perfect" compliance when built may now be non-compliant in several aspects of its design and structure. The time it takes to move from "in" to "out" of compliance can range from only a few months to several years depending on the frequency and nature of changes to local ordinances or laws.

Non-compliance has the potential to cost a building owner many thousands of dollars in out-of-pocket expenses following a "major" (defined later) property loss. Ordinance or Law coverages are designed to fill coverage gaps existing in the unendorsed commercial property policies and business income forms related to the additional costs and time associated with the enforcement of changes in local building codes.

This five-part series attempts to answer five questions related to the coverage provided in Ordinance or Law Endorsements:

1. What exclusionary wording in underlying property policies necessitate ordinance or law endorsements?
2. Who promulgates the building codes affecting commercial structures?
3. When must a damaged structure be brought into compliance?
4. How do the provisions of the two Ordinance and Law endorsements apply? and
5. How are coverage limits chosen?

While the concepts presented in this series apply to virtually any commercial property policy or ordinance or law endorsement, this article refers to and makes use of the relevant ISO forms and endorsements in the presentation of coverage.

Coverage Gaps

Exclusions within insurance policies exist for one of six reasons. One is directly applicable to the ordinance or law exclusions: the insurance company wants more information and more money before agreeing to provide the coverage.

All three commercial property Cause of Loss forms specifically exclude the increased cost of rebuilding, repair or remodeling created by the application of an adverse building code. Likewise, the business income policy specifically excludes any increased loss of business income (as defined in the policy) resulting from the lengthened "period of restoration" due to construction delays brought about by the enforcement of such codes.

Unendorsed commercial property policies pay only to replace, with modern building materials, what existed just prior to the loss. Further, these policies only pay for the part of the structure actually damaged, even if the jurisdictional authorities do not allow the undamaged part of the structure to remain and instead require it be torn down and rebuilt.

Likewise, the unendorsed business income policy pays only for the loss of income up to the point in time when the building should have been returned to "operational capability" absent any time extension directly related to the application of building codes. The "period of restoration" could be greatly increased as a result of local building code.

As is probably already evident, there is a high potential for uninsured, out-of-pocket building loss and additional loss of income when a structure suffering "major damage" is not in substantial compliance with the applicable building codes. These additional expenses and loss of income have the potential to bankrupt a business, or at least cause devastating financial hardships.

Building Codes Created by Hundreds of Organizations

Although local jurisdictions are charged with enforcing building codes, few ordinances are actually promulgated by the enforcing body. Most building codes are adopted from modifications to model codes developed by the International Building Code Council, the federal government and various other advisory organizations.

A state may occasionally amend a model code to strengthen particular requirements necessary to meet needs unique to them. Local jurisdictions also have the authority to alter any code to customize it to fit local needs.

One "advisory-only" federal code REQUIRES jurisdictional management and adaptation to produce a jurisdictionally-specific code: flood plain management codes. The federal government developed, maintains and updates the initial sample guidelines but the authority having jurisdiction must modify the program and develop its own flood plain management plan based on the locale's topography, water sources, development plans, history and any other factors unique to the community. This is a requirement placed on any community desiring to participate in the national flood insurance program (NFIP).

Other well-known construction codes emanating from the federal government include the requirements contained in the Americans with Disabilities Act (ADA) and National Earthquake Hazard Reduction Program's (NEHRP's) model code detailing building methods designed to protect against earthquake damage in the various seismic zones.

Most building code standards, however, are developed and published by advisory organizations. In fact, a 1996 study by the National Institute of Standards and Technology (NIST) revealed that there are 93,000 standards put forth by nearly 700 distinct organizations (NIST Special Publication 806, Standards Activities of Organizations in the United States). These promulgated standards apply to all aspects of construction and building materials from acoustical tile to boilers to fire protection systems.

Best known of these advisory organizations is the National Fire Protection Association (NFPA). The NFPA maintains the National Electric Code, the Life Safety Code, and essentially all advisory codes related to fire protection.

In addition to all the above sources of construction-regulating building codes, there is a pseudo-governmental group of organizations very rarely considered when planning ordinance or law coverage: historical societies.

Historical societies do not have governmental authority, per se; but they do lobby for and are granted the force of law through local ordinance governing the areas over which they have dominion (historic districts or individual historic buildings). The desire of these societies, be they local, state or federal, is to maintain and preserve certain areas or structures for posterity sake. There are currently over 80,000 sites on the National Register of Historic Places.

Structures guarded by an historical society may cost exponentially more to rebuild than a comparable building using modern building materials. Additionally, these structures will likely take longer to rebuild due to the lack of available period-specific materials that may be required by the governing historical society.

The additional cost of and additional time required to restore a structure under the protection of an historical society must be adequately planned for when structuring and choosing Ordinance or Law coverage limits.

Being able to fully grasp all the possible sources of building codes to which a particular structure must comply is mind boggling. Volumes of building codes may apply to a particular structure following major damage. Knowing this, it becomes quite evident that Ordinance or Law coverage is actually very broad in its application and payment of benefits; the only requirement is that the peril triggering the coverage be a covered cause of loss. All building codes directly controlling the rebuilding of the structure fall under the ordinance or law coverage blanket.

Following

Two commonly used theories of "major" damage are presented in the next post. Each has its own unique applications and complications; and agents must know which applies to a particular insured.