To this point the focus has been on the property and business income coverage gaps making the ordinance or law endorsements necessary and the source of the codes to which the coverage responds. This post attempts to explain what is meant by "major" loss or damage and present the various applications of the term as a function of the governing jurisdiction.

"Major" damage (or loss) is not necessarily a defined term in local building codes; it's simply the term chosen in this series to best represent the point at which the local jurisdiction considers a structure beyond safe repair due to age, condition or previous compliance with building code. This is the point at which the jurisdiction requires the entire structure be brought into compliance with current building code.

Governing jurisdictions utilize state laws to decide when the point of "major" damage has been breached. Two of the most commonly used statutory guidelines for determining "major" damage are:

  1. The Percentage Rule: Simply, this rule states that if the subject building is damaged beyond a set percentage of its "value," the entire structure must be brought into compliance with the current building code. This percentage varies by state ranging from a low of 30% to as high as 60%; or the

  2. Jurisdictional Authority Rule: Some state laws allow the "authority having jurisdiction" to decide at what point a structure has experienced "major" damage. This could be at 40%, 50% or 60% of its value; or based solely on safety, age, or zoning conditions. Several variations of this rule are used.

Of these two disparate statutes, the "Percentage Rule" seems it would be the easier to understand, plan for and apply; but it's not. The definition of "value" differs among the states and even jurisdictions subscribing to this rule. It may mean replacement cost, actual cash value or appraised value; it could even be the tax value. Some states and even the federal government, in the flood policy, use market value (what a willing buyer will pay a willing seller) as the basis of "value." Still other states reference the "Building Valuation Data" manual published by the International Conference of Building Officials as the source for values.

"Jurisdictional Authority" states introduce the problem of subjective opinion ("the rule of the person with the clipboard") into the application of local building codes. This fact makes planning very difficult, especially for insureds with buildings in multiple jurisdictions in the state. One local authority may choose to apply a percentage-type approach, while another may be far less objective in their decision process - making it a true guess as to the outcome. The state generally does not intercede in the application of the jurisdictional authority rule, making uniformity among local municipalities less likely.

Between the two, Jurisdictional Authority states greatly increase the necessity of an "inflation factor" when calculating the amount of ordinance or law coverage to purchase. As will be seen, there is no completely reliable method to arrive at limits, but it becomes an even more haphazard process when the definition of major damage is potentially a moving target.

Complicating the application of the different rules is a situation where a building is located in a Special Flood Hazard Area (SFHA) (flood zones "A" or "V") of a Jurisdictional Authority state. Buildings located in SFHA's that suffer "substantial damage" must be brought into compliance with current flood plain management requirements as per 44CFR 59.1. The federal government defines the term "substantial damage" to mean "damaged beyond 50% of its market value."

Which rule takes precedence following a loss? Likely, the most stringent rule will be applied to the damaged structure. If the authority having jurisdiction doesn't feel that the structure needs to be rebuilt, but the flood plain management requirements state that it does, then it must be brought into compliance with all codes. The reverse is also true.

"Major" damage carries a wide variety of meanings across the country depending on the state and the attitudes of the local jurisdictions. Add the federal government's superimposed authority when a structure is governed by flood plain management requirements, and the need to understand and apply ordinance or law coverage becomes more apparent.

Without one common rule or even a consistent application among the jurisdictions subscribing to essentially the same rule, it is imperative the brokers, risk managers and/or building owners: 1) know the rules of the state or states in which properties are located; 2) understand how "major" damage is defined within that rule; 3) be aware of jurisdictional differences of opinion; and 4) be mindful of the application of flood plain management requirements. Note that the rates for ordinance or law coverage don't depend on the application of the law, but the limits purchased do.


Both ordinance or law endorsement provisions are detailed in the next two posts with a description of coverage provisions and limitations. The final article in this series details methods for choosing the correct ordinance or law coverage limit.

From: "Jurisdictional Intervention: The True Cost to Rebuild"

By: Christopher J. Boggs, CPCU, ARM, ALCM, LPCS, AAI, APA

Reprinted with permission from The John Liner Review,

Volume 22, Number 1; Spring 2008.

Copyright 2009, Standard Publishing Corp., Boston, MA.

All rights reserved.