1. Forms
2. CP
3. CP-04-05

Ordinance Or Law Coverage - CP 04 05

1. What the form is

The CP 04 05, Ordinance Or Law Coverage endorsement, is a crucial part of a Commercial Property policy. It addresses potential coverage gaps that arise when local building codes, zoning laws, or other ordinances affect the cost and ability to repair or rebuild a damaged structure after a covered loss. Standard property policies, like the CP 00 10 Building and Personal Property Coverage Form, often provide limited or no coverage for these increased costs. The CP 04 05 provides three distinct coverages, which can be selected individually or in combination:

• Coverage A: Loss to the Undamaged Portion of the Building. If a building is partially damaged by a covered peril, and an ordinance or law requires the demolition of the undamaged portion of the building, this coverage pays for the value of that undamaged part. For example, if a fire damages 60% of a building, and a local ordinance mandates that any building damaged beyond 50% must be completely demolished and rebuilt to current codes, Coverage A would respond to the loss of the remaining 40% that was not directly damaged by the fire.
• Coverage B: Demolition Cost Coverage. This covers the expense to demolish and clear the site of the undamaged portion of the building when required by an ordinance or law. Continuing the previous example, Coverage B would pay for the costs to tear down and remove the debris of the undamaged 40% of the building.
• Coverage C: Increased Cost of Construction Coverage. This coverage pays for the additional costs to repair or reconstruct the damaged and undamaged portions of the building to meet current building codes or ordinances. This could include upgrades to electrical systems, plumbing, HVAC, or accessibility requirements like those mandated by the Americans with Disabilities Act (ADA). It's important to note that the basic CP 00 10 form includes a very limited amount of Increased Cost of Construction coverage (typically $10,000 or 5% of the building limit, whichever is less), which is often insufficient. Coverage C of the CP 04 05 allows the insured to select a higher, more appropriate limit.

A "Post-Loss Ordinance or Law Option" may also be available, providing coverage if an ordinance or law is enacted or revised after the loss but before reconstruction begins, and compliance is necessary to get a building permit or certificate of occupancy.

2. Classes of business it applies to

This endorsement is vital for owners of older buildings that may not conform to current building codes. When these "grandfathered" buildings suffer a significant loss, ordinances may prevent them from being repaired to their previous condition and instead require them to be brought up to current, more stringent standards. Specific examples include:

• Older commercial buildings in established urban areas: These properties are more likely to have been built before modern codes were enacted. For instance, a multi-story building constructed 50 years ago might need significant structural, electrical, and fire-safety upgrades if substantially damaged.
• Manufacturing and industrial facilities: These often have specialized construction and may house processes or materials that are subject to evolving environmental and safety regulations. A partial fire loss could trigger requirements for upgraded fire suppression systems or changes to building layout to comply with new codes.
• Hospitality businesses (hotels, restaurants): These are subject to strict health, safety, and accessibility codes (e.g., ADA compliance for restrooms, hallways, and entrances). If a fire damages a restaurant, the owner might be required to widen hallways or install accessible restrooms during the repair, increasing costs beyond simple replacement of damaged property.
• Properties in areas prone to natural disasters: Coastal regions or earthquake-prone zones often have building codes that are updated after major events to require more resilient construction. A building damaged by a hurricane might need to be rebuilt to new wind-resistance standards.
• Tenant-occupied buildings: While the CP 04 05 primarily addresses the building owner's interest, tenants who have made significant improvements and betterments may need a similar endorsement, the CP 04 26 (Ordinance or Law Coverage for Tenant's Interest in Improvements & Betterments), as the owner's CP 04 05 typically wouldn't cover their specific interest in those upgrades.

3. Special considerations

• Triggering Coverage: Coverage under CP 04 05 typically applies only if:
  1. The loss is caused by a peril covered under the main property policy.
  2. The enforcement of the ordinance or law is a direct result of the covered loss.
  3. The ordinance or law was in force at the time of the loss (unless the Post-Loss Option is included and applies).
  4. The building did not comply with the ordinance or law before the loss occurred, if the ordinance was already in effect and required compliance.
• "Major Damage" Thresholds: Many ordinances are triggered when damage exceeds a certain percentage of the building's value or square footage (e.g., 50%). It's crucial to understand the specific local ordinances, as these thresholds vary significantly by jurisdiction.
• Limitations:
  • The endorsement does not cover costs associated with pollution cleanup (e.g., asbestos abatement) or remediation of fungus, wet/dry rot, or bacteria unless specifically added back by another endorsement.
  • Coverage C (Increased Cost of Construction) is typically not paid until the property is actually repaired or replaced, and there's usually a time limit (e.g., two years) to complete the work.
  • If a building has both covered and non-covered damage, and the ordinance is enforced due to the entirety of the damage, the endorsement may only pay a proportional share. There's no coverage if the ordinance is triggered solely by non-covered damage.
• Relationship to Other Forms:
  • It is an endorsement to the CP 00 10 Building and Personal Property Coverage Form (or similar property coverage forms).
  • It is distinct from the limited Increased Cost of Construction coverage automatically provided in the CP 00 10.
  • For Business Income implications, the CP 15 31 (Ordinance or Law – Increased Period of Restoration) endorsement should be considered. This extends the period of restoration for business income losses if compliance with ordinances or laws prolongs the rebuilding process.
• Valuation: When replacement cost valuation applies, loss payment under Coverage C is generally based on the least expensive option to repair or rebuild to meet the ordinance requirements.

4. Key information for agents and underwriters

• Risk Assessment:
  • Age and condition of the building: Older buildings are prime candidates for this coverage due to a higher likelihood of non-conformance with current codes.
  • Local building codes and enforcement stringency: Research the specific ordinances in the building's jurisdiction. Some areas are much stricter or have more frequently updated codes. The "major damage" threshold is a key factor.
  • Occupancy type: Certain occupancies (e.g., schools, healthcare, assembly) face more rigorous code requirements.
  • Previous losses and upgrades: Has the building undergone partial upgrades? Are there known pre-existing code violations?
• Determining Adequate Limits:
  • Coverage A: The limit for Coverage A is part of the overall building limit; it does not increase it. The primary concern is ensuring the building limit itself is adequate to cover a total loss, including the undamaged portion if demolition is required.
  • Coverage B (Demolition Costs): This requires a separate limit. Agents should help clients estimate potential demolition costs for the undamaged portion of the building. This can be a significant expense, especially for larger or more complex structures. Consulting with local demolition contractors can provide realistic figures.
  • Coverage C (Increased Cost of Construction): This also requires a separate limit. Estimating this can be challenging. It involves considering the potential upgrades needed to meet current codes (e.g., ADA compliance, updated electrical/plumbing, sprinkler systems, energy efficiency standards). Consultation with local architects, contractors, or code officials is often necessary to arrive at an appropriate limit. It's often recommended to select a combined limit for Coverages B and C for flexibility.
• Pricing: The premium for Coverage A is often a percentage of the building premium. The building rate typically applies to the limits selected for Coverages B and C.
• Coverage Gaps to Address:
  • Without CP 04 05, the insured faces significant out-of-pocket expenses for demolition of undamaged property and for code-mandated upgrades. The limited coverage in the base CP 00 10 is rarely sufficient.
  • Ensure clients understand the exclusion for pollutants and fungi unless specific coverage is added.
  • Discuss the need for CP 15 31 if Business Income coverage is in place, as code compliance can significantly extend the period of restoration.
• Underwriting Guidelines:
  • Underwriters will scrutinize the age, condition, and location of the property.
  • Properties with known, uncorrected code violations may be ineligible or require remediation before coverage is offered.
  • The limits requested for Coverages B and C will be reviewed for reasonableness based on the building's characteristics and local construction costs.
  • Consider the potential for "demand surge" (increased costs of labor and materials after a widespread disaster) and whether additional endorsements like CP 04 09 (Increase in Rebuilding Expenses Following Disaster) might be relevant, as a portion of this can sometimes apply to Coverage C of CP 04 05.