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3. BP-04-46

Ordinance Or Law Coverage (BP 04 46)

The BP 04 46 Ordinance Or Law Coverage endorsement is a crucial addition to a Businessowners Policy (BOP) designed to protect business owners from the increased costs of rebuilding or repairing a damaged property when local ordinances or laws require upgrades or modifications to meet current building codes. Standard property insurance typically covers the cost to repair or replace a building to its condition before the loss. This endorsement bridges the gap by covering additional expenses mandated by the enforcement of these building codes after a covered direct physical loss.

The endorsement generally provides three distinct coverages, which must be selected and have limits shown in the schedule (or on the declarations page):

• Coverage 1: Loss to the Undamaged Portion of the Building: If a covered loss damages only part of a building, but an ordinance or law requires the demolition of the undamaged portion, this coverage pays for the loss of that undamaged part. For example, if a fire damages 60% of a building, and a local ordinance mandates that any building more than 50% damaged must be entirely demolished, this coverage would address the value of the remaining 40% that wasn't directly damaged by the fire.
• Coverage 2: Demolition Cost Coverage: This covers the expense of demolishing and clearing the site of the undamaged portion of the building when required by an ordinance or law. Demolition, especially in urban areas, can be a significant and often overlooked expense.
• Coverage 3: Increased Cost of Construction: This is perhaps the most frequently triggered part of the endorsement. It covers the additional costs to repair or reconstruct the damaged (and potentially undamaged) portions of the building to meet current building, zoning, or land use laws. This could include upgrades like installing sprinkler systems, making restrooms ADA-compliant (e.g., adding ramps, widening doorways), or using different, more expensive building materials now required by code.

This endorsement can also extend to cover Business Income and Extra Expense losses incurred due to the increased time it takes to comply with these ordinances or laws. This optional coverage must be specifically selected on the endorsement schedule.

Classes of Business It Applies To

Ordinance or Law coverage is particularly vital for:

• Owners of Older Buildings: Buildings constructed before current, often stricter, codes were enacted are most likely to require significant and costly upgrades after a loss. These "grandfathered" properties may suddenly need to meet modern standards for things like electrical wiring, plumbing, accessibility (ADA compliance), and fire safety.
• Businesses in Areas with Frequently Updated Building Codes: Municipalities, especially in coastal regions (windstorm resistance) or earthquake-prone zones, regularly update their building codes. Any significant repair or reconstruction will likely trigger the need to comply with the newest versions.
• Properties in Densely Populated or Historic Districts: Demolition and construction in these areas often face more stringent regulations and higher costs.
• Businesses with Specialized Construction: Facilities like restaurants requiring specific ventilation or fire suppression systems, or manufacturing plants with unique structural needs, may face substantial increased costs if codes have changed.
• Landlords and Tenants with Significant Improvements and Betterments: If a tenant has made substantial improvements to a leased space, and a loss occurs, this coverage can help cover the increased cost to rebuild those improvements to current code. For instance, if a cafe's original drywall (a tenant improvement) needs to be replaced with a double layer to meet new fire codes after a vehicle crashes into the building, this coverage could apply.

Special Considerations

There are several important factors to keep in mind when considering or using BP 04 46:

• Ordinance Must Be in Force at Time of Loss: The specific law or ordinance requiring the demolition or increased construction cost must be in effect at the time the direct physical damage occurs.
• Covered Cause of Loss Trigger: The initial damage to the building must be caused by a peril covered under the main property policy for this endorsement to apply. If the damage that triggers the ordinance or law is from an excluded cause, there's no coverage under this endorsement, even if other parts of the building sustained covered damage.
• Proportional Payment: If the building sustains damage from both covered and non-covered causes of loss, and this combined damage triggers the ordinance or law, the policy will typically only pay a proportion of the increased costs related to the covered damage.
• Minimum Requirements: The coverage only applies to the minimum requirements of the ordinance or law. It won't pay for discretionary upgrades beyond what is legally mandated.
• Limits are Key: The standard BOP often includes a small, token amount of Increased Cost of Construction coverage (e.g., $10,000). This is often grossly inadequate for significant ordinance or law exposures. The BP 04 46 allows for higher, separate limits for each of the three coverages (or a combined limit for Demolition and Increased Cost of Construction). Selecting appropriate limits is crucial.
• "Comply With" vs. "Enforcement Of": Newer editions of the form may use "comply with" an ordinance or law, which can be broader than older language referring to the "enforcement of" an ordinance.
• Repair/Replacement Timing: Coverage for Increased Cost of Construction (Coverage C) typically only applies if the property is actually repaired or replaced. There may also be a time limit (e.g., two years) to complete the repairs or reconstruction.
• Tenant's Improvements and Betterments: The coverage can extend to tenant's improvements and betterments if structured correctly.
• Exclusion for Fungi/Mold: Revisions to the form have clarified that losses triggered by or related to damage caused by fungi, mold, or rot are generally excluded from Ordinance or Law coverage, unless resulting from a specified peril like fire or lightning.

A critical real-world consideration is that different jurisdictions define "major damage" (which might trigger mandatory demolition of undamaged portions) differently. What might be a 50% damage threshold in one town could be 60% in another, significantly impacting how Coverage 1 and 2 apply.

Key Information for Agents and Underwriters

• Risk Assessment is Paramount:
  • Age of Building: This is a primary rating and underwriting factor. Older buildings inherently carry higher ordinance or law exposure.
  • Local Code Environment: Research the stringency and frequency of updates to building codes in the insured's locality. Areas with proactive code enforcement or specific hazards (earthquake, hurricane) require higher scrutiny.
  • Occupancy Type: Certain occupancies (restaurants, healthcare, manufacturing) have more specialized and frequently updated code requirements.
  • Construction Type: Some construction types may be more expensive to bring up to code.
• Pricing and Limits:
  • The premium for this endorsement will depend on the limits selected for Coverages 1, 2, and 3, and whether Business Income/Extra Expense is included.
  • Agents should actively discuss the potential inadequacy of the BOP's built-in Increased Cost of Construction limit and recommend appropriate limits for BP 04 46 based on a realistic assessment of the potential costs. This might involve estimating demolition costs and potential upgrade expenses (e.g., cost to add a sprinkler system).
  • Consider that compliance with ordinances and laws can add 50% or more to the cost of a claim.
• Coverage Gaps to Address:
  • Without this endorsement, the insured faces a significant out-of-pocket expense for the undamaged portion of the building if it must be demolished, the cost of that demolition, and all costs to meet new codes.
  • The standard BOP's debris removal coverage may not be adequate if a large, undamaged portion of the building must also be demolished.
• Underwriting Guidelines:
  • The building(s) to which this coverage applies must be specifically identified in the schedule.
  • Underwriters will carefully evaluate the age, condition, and location of the property.
  • A key underwriting question is whether the building is currently "grandfathered" under older codes. If so, any significant loss will likely trigger the need for expensive upgrades.
  • The endorsement schedule requires specific selections for each coverage part and for the Business Income/Extra Expense option, eliminating ambiguity.
  • Some insurers may have replaced the standard ISO BP 04 46 with their own proprietary version, so policy language should always be reviewed.
• Agent's Role:
  • Educate clients, especially those with older buildings, about this exposure. Many business owners are unaware of the potential financial impact of ordinance or law requirements.
  • Don't just assume the base BOP coverage is sufficient. Proactively offer and explain BP 04 46.
  • Help clients determine appropriate limits by discussing potential scenarios and costs. For example, what would it cost to add an elevator if now required for ADA compliance, or to upgrade the entire plumbing system?

In essence, BP 04 46 is not just an optional add-on; for many businesses, particularly those with older structures, it's a critical safeguard against potentially crippling uncovered costs that could mean the difference between reopening after a loss or closing for good.