1. Forms
2. CP
3. CP-04-26

Form CP 04 26: Ordinance Or Law Coverage – Demolition Costs And Increased Cost Of Construction Combined Limit

1. What the form is:

The CP 04 26 endorsement is a crucial part of a Commercial Property policy designed to protect policyholders from the financial repercussions of enforcing building codes, ordinances, or laws after a covered loss. Standard property policies typically cover the cost to repair or replace damaged property to its pre-loss condition. However, they often exclude or provide limited coverage for additional expenses mandated by local ordinances or laws, such as the requirement to demolish undamaged portions of a building or to upgrade the entire structure to meet current building codes. This endorsement specifically addresses these potential coverage gaps by providing a combined limit for two distinct coverages:

• Demolition Costs (Coverage B in many ordinance or law forms): This covers the expense of tearing down and removing debris of the undamaged portion of the building when an ordinance or law requires it. For example, if a fire damages 60% of a building, and a local ordinance mandates full demolition if damage exceeds 50%, this coverage helps pay to demolish the remaining 40%.
• Increased Cost of Construction (Coverage C in many ordinance or law forms): This covers the increased expenses to repair or reconstruct the damaged (and sometimes undamaged) property to comply with current building codes or ordinances. This could include upgrades like installing sprinkler systems, meeting ADA compliance, or using more expensive, code-compliant materials.

The key feature of CP 04 26 is that it provides a combined limit for these two coverages, offering flexibility in how the total limit can be applied to either demolition or increased construction costs. It is important to note that this endorsement is often specifically for a tenant's interest in improvements and betterments they have made to a leased space. The terminology in CP 04 26 is tailored to improvements and betterments, differentiating it from endorsements like CP 04 05, which typically covers the building owner's interest.

2. Classes of business it applies to:

This endorsement is particularly relevant for:

• Tenants with significant leasehold improvements and betterments: Businesses that have invested heavily in customizing their leased space (e.g., installing high-end fixtures, custom build-outs, specialized wiring or plumbing). If a loss occurs and the building owner's policy doesn't cover these improvements or the ordinance or law requirements related to them, the tenant could face substantial out-of-pocket expenses.
  • Real-world example: A restaurant tenant installs a commercial kitchen, custom dining area, and specialized ventilation. A fire damages part of the building. The local ordinance requires upgrades to the entire ventilation system and accessibility improvements (like wider doorways) for the whole unit. CP 04 26 could help cover the demolition of undamaged portions of their improvements to facilitate the new ventilation and the increased cost to rebuild their improvements to the new code.
• Businesses in older buildings: Older structures are more likely to be "grandfathered" under previous building codes. After a significant loss, ordinances may require the entire building (or the tenant's portion) to be brought up to current, more stringent codes, leading to substantial increased costs.
• Properties in areas with frequently updated or strict building codes: Locations prone to natural disasters (e.g., hurricane zones requiring specific roofing materials or window standards) or with progressive energy efficiency mandates often have codes that change regularly.
• Any commercial tenant whose lease makes them responsible for insuring their improvements and betterments, especially concerning code compliance. Lease agreements often dictate responsibility for repairs and insurance, including adherence to laws.

3. Special considerations:

• Separation of Improvements and Betterments: ISO rules often state that when CP 04 26 is added, improvements and betterments should not be part of an item also covering personal property under a blanket amount. This may require listing Tenant's Improvements and Betterments (TIBs) with a separate limit or using an endorsement like CP 19 10 to separate them from Business Personal Property (BPP) limits.
• Triggering Coverage: Coverage is typically triggered only after a direct physical loss from a covered cause of loss necessitates compliance with an ordinance or law. It generally doesn't apply to costs incurred to comply with an ordinance or law the insured was required to comply with before the loss occurred.
• "Undamaged Portion" Nuance: For Coverage A (Loss to the Undamaged Portion of Tenant's Improvements and Betterments, which is conceptually linked to the demolition costs in the combined limit), if undamaged improvements and betterments can be removed without damage prior to demolition, coverage for their value might not apply.
• Replacement Cost Requirement: Increased Cost of Construction coverage (Coverage C) often requires that the property actually be repaired or replaced, and sometimes that the valuation method is Replacement Cost. If repairs are not made, or if Actual Cash Value applies, the payout may be limited.
• Time Limits: Policies may impose a time limit (e.g., two years) to complete the repairs or reconstruction for Coverage C to apply.
• Post-Loss Ordinance or Law Option: Some versions or related endorsements might offer an option to cover costs related to ordinances or laws enacted or revised after the loss but before reconstruction begins.
• Exclusions: Coverage typically does not extend to costs related to pollutants, decontamination, or losses in value due to ordinances the insured should have complied with pre-loss.

4. Key information for agents and underwriters:

• Risk Assessment:
  • Age and condition of the building: Older buildings present a higher risk of significant ordinance or law exposures.
  • Nature of tenant's improvements: Extensive, specialized, or highly integrated improvements increase potential costs.
  • Local building codes and enforcement rigor: Areas with stringent, frequently updated codes, or aggressive enforcement (e.g., "50% rule" for demolition) warrant higher limits.
  • Lease Agreement Review: Crucial to determine the tenant's responsibility for improvements, repairs, and compliance with laws. This helps identify who bears the ordinance or law exposure.
• Pricing and Limits:
  • The combined limit needs to be carefully calculated. It should consider not just the value of the improvements but also potential demolition costs for undamaged portions and the significant cost increases associated with modern building codes (e.g., ADA compliance, energy efficiency, upgraded systems). These costs can sometimes exceed 50% of the claim.
  • Underwriters will assess the specific exposures. For example, a tenant in a new, code-compliant building might need a lower limit than a tenant in a 50-year-old structure.
• Coverage Gaps:
  • Without this or a similar endorsement, tenants face significant out-of-pocket expenses for code-mandated demolition and upgrades related to their improvements and betterments.
  • Ensure clarity on whether the building owner's policy provides any ordinance or law coverage for tenant improvements; often, it does not, or it is insufficient.
  • Standard Business Personal Property coverage usually does not adequately address these ordinance or law exposures for TIBs.
• Underwriting Guidelines:
  • Verify that TIBs are properly valued and scheduled, especially if CP 04 26 is used, due to rules about separating these limits from blanket BPP.
  • Consider the "Percentage Rule" in local ordinances (e.g., if more than X% of a structure is damaged, the entire structure must be brought to code or demolished). This significantly impacts the potential exposure.
  • The Coinsurance Additional Condition typically does not apply to the coverage provided under this endorsement itself, but it continues to apply to the overall limit of insurance for the Covered Property subject to the endorsement.