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Few structures fully meet the applicable jurisdictional building codes and regulations of the county, city, town, borough, village or township in which they are located. And regardless of the source of the ordinance or law—federal, state or local—all structures must comply with all building codes that are in force at the time of construction.

Even a building that is fully compliant when constructed grows noncompliant in only a few months to several years, depending on the frequency and nature of changes to local building codes.

Following a major property loss, noncompliance with local ordinances or laws can cost you thousands of dollars in out-of-pocket expenses.

Assessing Coverage Gaps

All three forms for commercial property causes of loss—basic, broad and special—specifically exclude increased costs associated with rebuilding, repairing or remodeling a structure in accordance with an adverse building code. Likewise, the business income policy specifically excludes increased loss of business income—as defined in the policy—that results from a lengthened "period of restoration" due to construction delays caused by enforcement of such codes.

Unendorsed commercial property policies limit loss payments to the use of building materials of like kind and quality, paying only to put back what existed just prior to the loss. Further, such unendorsed policies limit coverage to the part of the structure that sustained actual damaged—even when jurisdictional authorities do not allow the undamaged part of the structure to remain, turning a partial loss a total loss.

Similarly, 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 greatly increase as a result.

When a structure suffers “major” damage but is not in substantial compliance with the applicable building codes at the time of the loss, the potential is high for uninsured, out-of-pocket building loss and additional loss of income. These additional expenses and loss of income have the potential to bankrupt a business or, at the very least, cause devastating financial hardships.

Here are two of the most common statutory guidelines for determining "major" damage:

  • Percentage rule: If the subject building sustains damage beyond a set percentage of its value or square footage, the entire structure must be brought into compliance with the current building code.
  • 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 square footage, or it could be based solely on safety, age or zoning conditions. Several variations of this rule exist.

Neither rule is simplistic in its application. States that use the percentage rule don’t share a common definition of “value,” and those that use the jurisdictional authority rule introduce the problem of subjective opinion—"the rule of the person with the clipboard."

This means that "major" damage could have a variety of meanings 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 understanding and applying ordinance or law coverage becomes even more important.

Purchase Ordinance or Law coverage to prevent gaps in coverage to avoid extra out of pocket expense if you are required to repair more than the insurance reimburses.
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