Exponential technological advances, improvements in building materials and methods, changes in external and environmental conditions and the rewriting and re-codification of building codes all occur during the life of a house. The results, within 10 years of completion (maybe even as little as five years past) the house may violate some part of the most current jurisdictional building codes.
Any house not in compliance with current building codes subjects the owners to a coverage limit gap following a “major” loss (as defined below) because: 1) specific jurisdictional requirements stipulate the point at which a particular house has suffered “major” damage and must be brought into building code compliance; and 2) Insurance Services Office’s (ISO’s) unendorsed homeowners’ policy provides only a minimal amount of coverage to pay for the increased expenses resulting from the enforcement of current building codes. Combined, the limitations on coverage and the building code’s specifications can lead to a potentially large out-of-pocket expense for the insured.
Major loss or damage is uniquely defined by individual jurisdictions with each applying its own connotative twist. However, two broad categories of major damage have evolved into which most state and local building codes fall:
• The Jurisdictional Authority Rule: States applying this as the measure of major damage allow the authority having jurisdiction (the local government) to judge when a damaged building must be brought in its entirety 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 local building code. There is no subjective interpretation involved.
Each rule presents its own set of problems regarding ordinance or law coverage and the minimal limits automatically provided in most homeowners’ policies. For example:
• The jurisdictional authority rule is subjective in its application. Each jurisdiction develops and applies its own standard to define major damage and determine a structure’s fitness for continued 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, making risk management and insurance planning very difficult in states applying this rule. The jurisdictional authority rule has been likened to being “at the mercy of the man with the clipboard.”
• The percentage rule’s definition of “value” differs among the states applying this as their codified statute. “Value” in these states could mean anything from actual cash value to appraised value or even market value*. Such breadth of interpretation can create problems for agents that operate in more than one state. (*Market value is negotiated between and agreed to by a willing buyer and a willing seller. It can fluctuate up and down based on the economy, condition, use or need and has little relation to the true cost to rebuild a particular structure.)
Ordinance or Law Sources
Building ordinances and laws enforced by local jurisdictions are promulgated by a wide assortment of contributors. States use these model codes to create a statutory infrastructure but endow to local jurisdictions the authority to adopt and customize building codes to meet local preferences and needs as necessary. Building codes and ordinances are developed and published by:
The Federal Government. Three major advisory codes flow from the Federal government, flood plain management requirements, building requirements contained in the Americans with Disabilities Act (ADA) and the National Earthquake Hazards Reduction Program (NEHRP) model code. All of these are model codes, most specifically the flood plain management requirements (communities desiring to be part of the NFIP must develop their own code utilizing the model code from FEMA). Each state and even the local jurisdiction mold these codes to fit their particular need and exposure. These are not the only codes developed by the Federal government, but they are the best known.
Advisory Organizations. Most codes and standards are developed, monitored and updated by independent advisory organizations. A 1996 National Institute of Standards and Technology (NIST) study revealed that 700 distinct advisory organizations account for more than 93,000 separate standards and codes (not all are building codes, these includes codes for materials, boilers, fire protection systems, etc.).
State and Local Codes. Each state and local jurisdiction has the authority, subject to certain minimum requirements, to massage codes and ordinances as necessary to meet that jurisdiction’s needs.
Historical Societies. Although these societies are not branches of local, state or national governments, they are granted pseudo-governmental authority regarding the rebuilding of particular structures. Historical societies’ desire to save the historical integrity of a structure for future generations; such efforts, while admirable, can significantly increase the cost of rebuilding a house under the society’s control. Any house in an historical district merits special attention and potentially special endorsements outside the intended scope of this article.
Agents planning their homeowner client’s insurance and risk management program with these authorities and exposures in mind:
• Need to have a basic understanding of the building codes applicable to and affecting their homeowners’ clients;
• Must know which rule of “major damage” is applied; and
• Are required to be versed in how the individual jurisdiction applies the specified rule.
This is the first of a four-part series on ordinance or law coverage for homeowner clients. The problem and the sources of codes were introduced above. Following posts will highlight the coverage provided by the unendorsed homeowners’ policy, claims examples spotlighting the effects of the gap, endorsements that many think correct the problem and the endorsements that do, in fact, mitigate the gap. The last post will be a sample letter agents can copy and paste to their letterhead and send to their clients.