Building codes present a major challenge to full recovery for an insured. In the event an insured’s property has been damaged or destroyed, the insured may face additional costs from the application of building laws and ordinances that govern the repair, reconstruction, or demolition of buildings.
Ordinances and laws come in all shapes and sizes and vary from one location to another. Some local or state governments enforce strict codes due to factors such as location and usage. For example, in states prone to earthquakes, specific codes are developed in order to take this peril into account. Building codes are mainly directed at new construction and can affect the size, height, usage, and the materials used (among others). However, some codes require partially damaged buildings to be demolished and reconstructed rather than repaired.
Generally, standard property insurance policies cover repair and reconstruction as the building stands today. Consequently, if any building ordinances or laws change when a loss occurs, an insured will most likely face a significant increase in the repairs and reconstruction costs. Most property policies do not cover, and specifically exclude, the increased cost of rebuilding, repairing or remodeling caused by the application of local, state and federal building codes. In addition, these policies do not cover the costs associated with any required teardown of a partially damaged property, including the costs of removing the debris and demolition. This exclusion does not only apply to buildings, but also to any losses caused by a change in building codes to features such as machinery, equipment, fixtures and the like.
Because these increased costs are not covered under typical property policies, it is important for an insured to consider building ordinance insurance. Building ordinance insurance coverage fills the gaps created by these exclusions. Generally, this coverage is available by endorsement and covers some losses caused by building code enforcement. There are three policies an insured may purchase that cover (1) the loss to the undamaged portion of a building, (2) the costs to demolish and clear the undamaged parts of the building, and (3) the increased cost of construction. Although these policies help bridge the gap in coverage, these policies contain some exclusions including loss caused by fungus, pollutants, and bacteria. As always, it is important for an insured to review the policy and its exclusions.