Ordinance or Law Coverage: The Rebuilding Cost Many Homeowners Policies Limit
What You’ll Learn
- Why repairing to current building code can cost more than repairing what you had
- The three pieces ordinance or law coverage typically includes
- How much a standard policy may include, and how endorsements can raise it
- Which homes it matters most for, and how it relates to replacement cost and flood insurance
- What to check on your declarations page and ask a licensed insurance agent
Ordinance or law coverage can help pay the extra cost of repairing or rebuilding a home to meet current building codes after a covered loss, up to the policy's limits. It's easy to overlook, because the gap doesn't show up until there's a claim: the cost to fix your house the way it was can be very different from the cost to fix it the way today's codes require. Many standard homeowners policies exclude that extra cost or cover only a limited amount of it. Here's how it works and what to check before your next renewal.
What ordinance or law coverage is
Building codes change over time. Rules for electrical wiring, plumbing, roofing, insulation, smoke alarms, wind resistance and flood elevation are updated as building science and local risks change. A home built under older codes is generally allowed to stay as built. But when it's damaged and repaired, the local building department may require the repaired portion, and sometimes the whole structure, to meet current code. When that's triggered, and how much has to be upgraded, varies by jurisdiction.
A standard homeowners policy is generally designed to repair or replace what you had. Costs that come from enforcing a building code or ordinance are often excluded, except for whatever limited amount the policy adds back. Ordinance or law coverage is that add-back. You may also see it called building code upgrade coverage or increased cost of construction coverage, and it can often be increased with an endorsement.
A hypothetical example
Hypothetical example, for illustration only: A house built several decades ago has a kitchen fire. Assume the policy covers repairing the fire-damaged kitchen. But when the contractor pulls a permit, the building department requires the rebuilt area's wiring to meet current code, interconnected smoke alarms, and updated roof-to-wall connections where the roof was opened up. None of that existed in the original kitchen.
Whether those upgrade costs are paid, and how much, depends on the policy's ordinance or law provisions and limits. If the limit is lower than the cost of the required work, the homeowner generally pays the difference.
Now take it further. Suppose the damage is extensive enough that local rules require the remaining undamaged part of the house to be torn down and the whole home rebuilt to current standards. Dwelling coverage typically addresses the damaged portion. The cost of demolishing and rebuilding the undamaged portion is exactly the kind of gap ordinance or law coverage is meant to fill.
The three pieces it typically includes
Policy forms vary, but ordinance or law coverage generally addresses three kinds of cost:
- Loss to the undamaged portion. If a code requires an undamaged part of the home to be demolished, this covers the value of that undamaged part, which a standard policy otherwise wouldn't treat as damaged.
- Demolition and debris removal. The cost to tear down and haul away undamaged portions that the code requires to be removed.
- Increased cost of construction. The extra cost to repair or rebuild to current code, beyond what it would cost to restore the home as it was.
Some policies combine these under one limit. Others set separate limits for each piece, or cover some and not others. Read your form, because your policy wording controls.
How much a standard policy may include
Many standard homeowners forms include a limited amount of ordinance or law coverage, often expressed as a percentage of the dwelling limit. Ten percent is common on standard forms. Some policies include none, and some carriers offer it only as an endorsement.
An endorsement can often raise the limit, for example to 25% or 50% of the dwelling limit, for an added premium. Some states require insurers to offer this coverage. Availability, limits, and whether the amount is in addition to your dwelling limit or part of it all vary by carrier, policy form and state.
Two other details are worth knowing. Many policies pay the increased construction cost only when the repair or rebuild is actually completed, and only for upgrades that are required by law. Upgrades you choose to make on your own generally aren't covered by this coverage.
Which homes it matters most for
Ordinance or law coverage is worth a closer look when the property has characteristics like these:
- An older home built under earlier codes. Original wiring, plumbing, roof framing or windows may be far from what current code requires.
- A home in an area where codes have changed significantly. Coastal areas, for example, have often updated wind-resistance standards for roofs, windows and structural connections.
- A home in or near a flood zone. Local floodplain rules may require a substantially damaged home to be elevated or otherwise brought into compliance when it's rebuilt.
- A home with additions or renovations done under older rules. Those portions may also need upgrading if they're damaged.
If you're not sure how much your local codes have changed since your home was built, your local building department can tell you which code edition applies now.
How it fits with replacement cost and actual cash value
Replacement cost coverage generally pays to repair or replace damaged property with materials of like kind and quality. It's typically not designed to pay for upgrades a code requires, so even a replacement cost policy can leave a code-upgrade gap. If your dwelling is settled on an actual cash value basis, depreciation is subtracted, and code upgrade costs are still a separate question. See replacement cost vs. actual cash value for how settlements work.
Extended replacement cost endorsements, which add a cushion above your dwelling limit, are also a different feature. Some carriers treat code upgrade costs separately from that cushion. Ask how your policy treats each one.
Flood damage is a separate policy
Standard homeowners policies generally exclude flood damage, so the ordinance or law coverage on a homeowners policy generally won't respond to a flood loss. Flood insurance is a separate policy. National Flood Insurance Program policies include their own provision, called Increased Cost of Compliance, that may help with certain elevation or other compliance costs after qualifying flood damage, subject to its own limits and rules. Private flood policies vary. See flood insurance and flood zones for what to check.
What to check on your declarations page
Your declarations page is the summary at the front of your policy. Look for:
- An ordinance or law endorsement, listed by name or by form number.
- The limit, shown as a percentage of your dwelling limit or as a dollar amount.
- Your dwelling limit, since a percentage-based limit is calculated from it. If your dwelling limit is low, the ordinance or law amount shrinks with it.
- Whether it's additional coverage or part of the dwelling limit. The form or endorsement wording usually says.
- Your deductibles, including any separate wind or hurricane deductible. See how home insurance deductibles work.
If the declarations page doesn't make it clear, ask for a copy of the full policy form and any endorsements. The National Association of Insurance Commissioners (NAIC) also has consumer guides on reading a homeowners policy, and your state insurance department can answer questions about requirements where you live.
Questions to ask a licensed insurance agent at renewal
- Does my policy include ordinance or law coverage, and what is the limit?
- Is that limit in addition to my dwelling limit, or part of it?
- Does it cover all three pieces: the undamaged portion, demolition, and increased cost of construction? Are there separate limits?
- What options does this carrier offer to increase the limit, and what would each change in my premium?
- Does payment depend on completing the repair or rebuild, and are there time limits for doing so?
- Is my dwelling limit current with today's construction costs, so the percentage is based on a realistic number?
Renewal is a natural time to ask, because changes can usually be made then without disrupting coverage. If your premium has climbed, see why your renewal premium jumped before you trim coverage that may matter more than it looks.
Frequently asked questions
Is ordinance or law coverage included in a standard homeowners policy?
Often a limited amount is included, commonly expressed as a percentage of the dwelling limit, but some policies include none. It varies by carrier, form and state. Check your declarations page and ask a licensed insurance agent.
Does it pay for upgrades I choose to make while repairing?
Generally no. It's designed for upgrades required by building codes or ordinances after a covered loss, not for voluntary improvements.
Does it cover code upgrades after a flood?
A homeowners policy generally excludes flood, so its ordinance or law coverage generally won't apply to flood damage. Flood policies have their own provisions and limits.
Is it worth increasing the limit?
It depends on your home's age, how much local codes have changed, and the cost of the endorsement. Older homes and homes in areas with updated wind or flood standards are where the question matters most. Compare options with a licensed insurance agent.
This article is general information, not insurance advice. Coverage availability, limits, terms and requirements vary by carrier, policy form and state, and your policy wording controls. The example is hypothetical and for illustration only. Ask a licensed insurance agent about your policy.
