Insurance Services Office's (ISO's) unendorsed homeowners' policy provides a limited amount of coverage to pay the costs associated with the enforcement of any ordinance or law following a major loss. The next several paragraphs will highlight the coverage and limit provided by the unendorsed homeowners' policy, list the types of government-induced losses this limited amount is required to cover and provide claims examples.

Coverage Included in the Homeowners' Policy

Unendorsed, ISO's homeowners' policy(ies) provide only 10 percent of Coverage "A" (Dwelling), in addition to the Coverage A limit, to pay the cost of a loss or increase in loss resulting from the enforcement of any ordinance or law to which the house is subject. For example, a policy with a $300,000 Coverage A limit would provide up to $30,000 of additional protection to cover the add-on expenses arising from a building code-induced loss. Such limit would be called upon to cover three "additional costs" as detailed in the policy's "Additional Coverage - Ordinance or Law" provision:
1) The increased cost necessary to bring the damaged part of the house up to current code;
2) The cost to tear down and remove the debris of the undamaged part of the structure; and
3) The cost to rebuild or repair the undamaged part of the structure in compliance with current building code.

That's a lot to expect from such a minimal amount. Remember apart from this extension or any attached ordinance of law endorsement (if any), the homeowners' policy pays only the cost to tear down, remove the debris of and rebuild/repair the damaged part of the house. NO coverage apart from this additional coverage applies to the undamaged part of the house. An example using the same $300,000 house will help spotlight the potential limit gap. Following are some pertinent facts necessary for this example:

• Value of house: $300,000
• Square footage: 3,000
• Ordinance or Law Additional Coverage (included in the policy): $30,000
• Ordinance or Law Rule applied by the jurisdiction: Percentage Rule (60 percent of "value")
• Amount of Damage: $200,000 (66.7 percent)
• Square Footage Damaged: 2,000 square feet

Based on the above information, the jurisdiction will likely require the house to be torn down and rebuilt to meet current building code. The homeowners' coverage part will only pay the $200,000 plus the cost to remove the debris of the damaged property. Any additional cost resulting directly from the application of one or several ordinances or laws is specifically excluded (except for the small amount granted in the additional coverages section). So, how will the coverage break down; what claims costs will the ordinance or law extension be required to cover and how much will the insured have to pay from his own pocket?

The 10 percent ($30,000) ordinance or law coverage will be called upon to pay the additional per square foot cost to bring the damaged part of the structure up to current building code once rebuilt; the cost to tear down the remaining (undamaged) part of the structure and the cost to rebuild the undamaged part of the structure to comply with the current building code. What might all of this cost and is $30,000 enough? Assumptions needed to complete this example are:

• Cost to rebuild to current building code: $120 per square foot
• Cost to rebuild to prior code: $100 per square foot
• Demolition and Debris Removal cost: $5.00per square foot

Using this information and the costs and limits presented above, the homeowners coupled with the ordinance or law additional coverage will respond and pay as follows:

Homeowners' Policy (without the additional coverage)
• Cost to remove the debris of the damaged portion of the house: $10,000 (2,000 sq. ft. x $5 per sq. ft.)
• Cost to rebuild the damaged portion of the house to old code: $200,000 (2,000 sq. ft. x $100 per sq. ft.)

Total amount paid by the homeowners' coverage (without the additional ordinance or law coverage): $210,000

Ordinance or Law Additional Coverage
• Additional cost to bring the damaged portion of the house up to current building code: $40,000 (2,000 sq. ft. x $20 per sq. ft. (the difference between old building code and current building code));
• Cost to tear down and remove undamaged portion of the house: $5,000 (1,000 sq. ft. x $5 per sq. ft.); plus
• Cost to rebuild the undamaged part of the house to current building code: $120,000 (1,000 sq. ft. x $120 per sq. ft.)

Total amount that would be directly related to the enforcement of the ordinance or law: $165,000.

The amount of coverage available in the unendorsed policy is only $30,000 so the insured in this example would be out of pocket $135,000.

Even if the above example were altered to 80 percent of the house being damaged, the cost to comply with local building code as per the above break down would still be around $123,000 ($93,000 out of the insured's pocket).

Going one step further, if the difference between the old building code and the new is only $10 per square foot, and if the house is 80 percent damaged the amount provided by the ordinance or law extension is still short by $63,000 ($93,000 total cost minus the $30,000 available).

(*Contents coverage and loss of use is not considered in the above example.)

Total Loss

Essentially, the application of an ordinance or law requiring the house to be torn down and rebuilt to current code creates a TOTAL LOSS for the insured even if the house was not totally destroyed by the covered cause of loss. And the additional cost created by the enforcement of the building code is SPECIFICALLY excluded by the policy and coverage is limited to the amount given back in the Additional Coverage - Ordinance or Law (unless increased by endorsement).

Following

The next post will discuss some of the "real-world" fallacies with the above examples; but it will also briefly explore the some of the "real-world" pitfalls of not addressing this exposure. Plus, endorsements that some feel correct this problem will be discussed and a brief discussion of the endorsement that increases the limit of ordinance or law coverage available to the insured.