Your Homeowners Policy Might Not Cover Rebuilding Costs

Building Ordinance or Law Coverage Can Help

A windstorm blows though your tree-lined neighborhood and one of the large oak trees crashes through the center of your house. Fortunately, wind is a covered peril and your insurance responds to the damage.

But when your contractor applies for the construction permits, there’s a new wrinkle: Your home isn’t up to current electrical code standards. Since you’re technically rehabbing a portion of your home, the electrical wiring must satisfy the current building ordinance.

Insurance won’t pay the full cost because of a common homeowners policy limitation called a building ordinance or law coverage clause. In other words, the cost to bring your house up to current building codes is not covered by your insurance, even though a covered peril (the windstorm) is the reason you’re doing the rehab in the first place. 

What does this mean for you? A big out-of-pocket cost you weren’t expecting.

Even with a tree in your living room, you may not be covered for the full cost of rehabbing your home if your homeowners policy contains a building ordinance or law exclusion or limitation. But you can plan ahead and get additional coverage now.

Types of building ordinance or law coverage

The main purpose of any homeowners insurance is to return your property to the same condition it was in before the loss. A building ordinance or law endorsement extends your homeowners coverage to parts of your home that are undamaged by a covered peril (such as a tree) but must be repaired or upgraded to satisfy a community building code.

Here are some building ordinance or law coverage endorsements to consider:

  • Loss to undamaged portion
  • Demolition cost
  • Increased cost of construction
Loss to undamaged portion coverage

A tree in your living room is unquestionably a problem and the clear cause of your major catastrophe. Regardless, you’ll have to work with the insurance company to figure out how much damage was done to your home even when the cause of the damage is obvious.

For example, let’s say the insurance company has determined that 70% of the structure of your house is damaged because of the impact from the oak tree. Insurance will pay to repair the parts damaged due to the impact. But when you’re applying for construction permits, the city informs you that you must demolish your home and rebuild it. City ordinance requires that structures damaged beyond 50% must be completely rebuilt, not just repaired. The limit on your standard homeowners policy is $300,000. Is that enough?

You might be covered for some of the cost to rebuild, but it depends on the wording of the policy coverage and the overall limits of your policy. The standard limit on building ordinance or law coverage is usually 10% (typically, defined under dwelling coverage A). The contractor quotes you $60,000 to rebuild the undamaged parts of your house. Your 10% limit pays on $30,000. You’re looking at covering a $30,000 coverage gap out of your own pocket.

Increasing your building ordinance or law coverage limit to 20% (instead of the standard 10%) could help close the gap. You need to think in terms of a worst-case scenario weighed against current market costs for labor and materials.

Demolition cost coverage

Before you think the gap is closed, remember that the house isn’t going to tear itself down or clean up afterward. You might have some coverage for rebuilding the damaged portion, but not for demolishing the undamaged parts and removing the debris. Will insurance cover your costs? It depends.

The demolition cost endorsement will pay to demolish the undamaged portion and remove the debris (if building ordinance or law requires it). But without any extra coverage endorsements, you’ll be forced to share the 10% standard homeowners coverage across both rebuilding and demolition. Even if you increase coverage from 10% to 20% (using the example above), you might still be stuck with some out-of-pocket cleanup costs beyond the $60,000 to rebuild.

Again, consider the worst-case scenario in terms of cleanup costs such as machinery, labor and disposal fees. If you secure a building ordinance or law endorsement to insure 25% of your overall homeowners limits, you’ll have $75,000 total for the project. That leaves you with an excess of $15,000 for demo costs.

Increased cost of construction coverage

Even if your home isn’t forced into a complete demo and rebuild, you might end up having to rebuild your home to code anyway.

Consider the same example, but only 35% of your house has structural damage. You apply for building permits, but the city inspector requires you to upgrade the electrical and plumbing in your home. That estimate comes in at $40,000. Under many standard building ordinance or law provisions, you’d be able to call on the 10% standard coverage for your $300,000 policy ($30,000) leaving you with $10,000 to finance on your own.

The standard homeowners policy for building ordinance or law leaves room for some coverage (normally 10% of the limits), but it doesn’t always fully compensate you. A higher limit written to 20% could help protect you from out-of-pocket costs associated with rebuilding both the damaged and undamaged parts of your house to code.

A standard policy might leave you exposed

Find out what your local building ordinance or laws require. Codes may differ based on the type of zoning your property is classified under (business, residential or a combination). Subdivisions within a city might have their own special codes in addition to the overall city or municipality code, so make sure to find out. Ask if there are any time limits on rebuilds, too. Depending on the age and value of your home, you might be looking at a serious cash investment to top off an already stressful situation.

Your insurance professional can help

Contact your insurance professional about building ordinance or law coverage on your existing homeowners policy. You might have some coverage, but is it enough to handle today’s market prices for materials and labor? Don’t wait for a terrible gust of wind and a felled tree to find out how much the shortfall is. A building ordinance or law endorsement could be one more layer of protection to help make sure your budget isn’t on the demo end of a wrecking ball.

Contact Us

Learn more about building ordinance or law coverage on your homeowners policy. Connect with one of our team members today.

This content is for informational purposes only and not for the purpose of providing professional, financial, medical or legal advice. You should contact your licensed professional to obtain advice with respect to any particular issue or problem. Please refer to your policy contract for any specific information or questions on applicability of coverage.

Please note coverage can not be bound or a claim reported without written acknowledgment from a OneGroup Representative.

Written content in blog post: Copyright © 2019 Applied Systems, Inc. All rights reserved.