Homeowner associations are commonly required by their governing documents to insure common element structures. This is especially true for condominiums where the association insures the majority of the building structures.
With the passage of time, building codes and ordinances change to reflect new standards in construction. These changes generally relate to fire safety, structural integrity, and energy efficiency of buildings. Although buildings are constructed to meet or exceed building codes in effect at the time of their construction, as buildings age they eventually grow outdated and noncompliant with current codes.
After a disaster, associations often face questions such as:
- What happens if a building is partially damaged by fire, but much of the structure remains undamaged? Will the association’s insurance pay to demolish the undamaged portion of the building?
- What if current building codes require that the partially damaged building be demolished rather than rebuilt?
- What if rebuilding the structure requires the association to install improvements such as a fire prevention sprinkler system not contained in the original building, but now required by law?
- Will the association’s insurance only pay to replace the building to its condition prior to the fire, forcing the association to pay for improvements; or will insurance pay to replace the building and bring the structure up to current building codes?
The answer to these questions depends on whether the association purchased an Ordinance and Law endorsement to its property insurance policy. Ordinance and Law is a type of insurance coverage not typically required by a community association’s governing documents. In fact, Ordinance and Law is actually three separate types of coverage. Together, they provide protection for additional expenses resulting from the enforcement of ordinance and law that is triggered when there is covered cause of loss to an insured building, such as fire, tornado or gas explosion. The three types of coverage are as follows:
Coverage A – Loss to the Undamaged Portion of the Building. In some jurisdictions, ordinance or law requires that a partially damaged building be demolished (in other words, it becomes a total loss). Coverage A states that if such ordinance is in place and is enforced by the local authorities, the insurance policy will treat the claim as a total loss even though the building was only partially damaged.
Coverage B – Increased Demolition Cost. This pays the increased cost to demolish the undamaged portion of the building if you are required by ordinance or law to implement Coverage A.
Coverage C – Increased Cost of Construction. This pays for upgrades required by the enforcement of current ordinance and law. A good example of a significant upgrade you might be required to make if you had a major fire would be the installation of a fire sprinkler system throughout the building.
Ordinance and Law coverage is specifically excluded by most property insurance policies but can be added by an endorsement for an additional but reasonable premium. Some insurance carriers do include a small amount of Ordinance and Law coverage in their property coverage to protect the community association. Therefore, it is important for a community association to evaluate what amount of Ordinance and Law coverage is appropriate, and structure their coverage accordingly. It is common sense that the older the buildings, the greater the exposure for loss due to changes in local building ordinance and law.
Therefore, it is important for associations, especially aging communities, to evaluate the amount of Ordinance and Law coverage necessary to protect the interests of the community. We recommend associations review their insurance policies frequently and discuss with their insurance agent and association manager the merits of adding an Ordinance and Law endorsement to the association’s current property policy.