Ordinance or Law--An Additional Coverage Available Under Many Florida Residential Policies
Many residential insurance policies in Florida have additional coverage for “Ordinance or Law” or code upgrade coverage. I wanted to write about this additional coverage in the context of the Hurricane Law series because it is important to understand how this additional coverage kicks in during a typical residential hurricane claim. In South Florida, many property insurance claim issues remain from the 2005 and 2005 hurricanes. Many of the open disputes concern hurricane damage to residential roofs and whether they can be repaired or necessitate replacement. Of course there are many other issues still being litigated from the hurricanes of 2004-2005 in Florida, but this post will focus on the Ordinance or Law additional coverage in the context of a residential roof.
Insurance carriers may dispute the extent of damages to a roof and issue payment to the policyholder to repair areas of the roof that the insurance carrier agrees were damaged by a hurricane. If the policyholder takes that insurance claim payment, hires a roofer and signs a contract for roof repairs, they will likely file a repair permit application with the local building code department. The Ordinance or Law additional coverage can be triggered if the building code department rejects the permit application because the building code requires certain upgrades, so that complete replacement of the policyholder’s roof is necessary. Building code departments have many different reasons for rejecting repair permits, but the most common reason is when the percentage of repairs exceeds 25% of the total roof area. It may also be that the building code requires the roof to be replaced because of certain required code upgrades (such as tie downs, etc.) that cannot be accomplished without the replacement.
Residential insurance policies that contain the additional coverage for Ordinance or Law may contain a provision worded similarly to this example:
Ordinance or Law
You may use up to 25% of the limit of liability that applies to Coverage A for the increased costs you incur due to the enforcement of any ordinance or law which requires or regulates:
The construction, demolition, remodeling, renovation or repair of that part of a covered building or other structure damaged by a Peril Insured Against;
The remodeling, removal or replacement of the portion of the undamaged part of a covered building or other structure necessary to complete the remodeling, repair or replacement of that part of the covered building or other structure damaged by a Peril Insured Against.
The typical Ordinance or Law provision states that a policyholder may use the additional coverage for increased costs incurred when building codes require the removal of the undamaged part of the building to complete repair to the area of the building that was damaged by the loss claimed. In the roof example, replacement of the entire roof would be covered, if it were required by building codes.
In Florida, one way for policyholders to claim this additional coverage is to demonstrate that they have “incurred” the expense that the code upgrade requires. In the roof example, that may include providing the insurance carrier with the signed contract for replacement of the roof, along with the permit application, rejection and documentation from the building department.
Again, it is important for Florida policyholders to be aware of Ordinance or Law coverage and to speak with their agents, public adjusters or attorneys to verify if their policy contains this coverage and also whether they can use the coverage under their particular situation.
Currently Citizens Property Insurance is the largest residential insurance provider in the State. Their 2010 all-peril Policies, HO3 and DP3, contain the following language.
General Exclusions
“We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss.
“Ordinance or Law, meaning the enforcement of any ordinance or law regulating the use, construction, repair, or demolition of a building or other structure, unless specifically provided under this policy.”
The policy does not contain the additional “Ordinance and Law” coverage as stated in the last sentence “unless specifically provided under this policy”.
In previous HO3 and DP3 policies, it was mandatory to contain the additional “Ordinance and Law” coverage unless rejected by the policyholder. The previous polices also contained exclusions for losses caused by “Ordinance and Law”, but provided additional coverage under “Ordinance and Law” for a loss by a covered peril. The current language excludes “indirect” losses and also states, “Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss.”
Per Florida Statue the insurance policy must also provide in certain large bold font the fact that the policy contains a separate deductible for Hurricane Losses (which Lloyds violated) and that the policy does not contain Flood coverage.
The new Citizens HO3 and DP3 polices read
NEITHER “FLOOD” NOR “ORINANCE OR LAW” COVERAGE IS PROVIDED IN THIS POLICY
I assume the policy contains this as a defense for future claims and to protect their agents against errors and emissions lawsuits.
I asked my client that purchased this policy, if they were explained by their agent regarding this exclusion or any other item in the policy. The client stated, that just like every time they have purchased homeowners insurance, they simply called their agent, explained that they needed coverage and the agent provided them this policy. Nothing more was said. I assume that probably all of the new Citizens policies and renewals contain the same language and that there will be a major problem with this during the next hurricane.
The State needs to regulate the insurance companies and enforce that all policies contain the same language within. Recently I have heard in the news and saw firsthand that premiums have increased. If the State is allowing the insurance companies to raise premiums, then they should not be allowing them to modify the policy language to their advantage. Consumers should think about future claims not purchasing the lowest premium insurance. Premiums are raising, but property taxes are reducing.
Agents need to educate their customers when purchasing a policy. I remember 10 years ago, if you were an agent and your customer rejected suggested coverage, you needed them to sign a form stating that they rejected the coverage, or the agent was liable in the event a loss occurred under that coverage. Usually the difference for lower deductibles or additional coverages, is only a very small additional amount of premium, but if the agents don’t quote these figures then the customers are left with the first policy suggested.
In future hurricane claims, I can already imagine the insurance companies paying for a tile count, meaning that you will only be paid for the missing tiles, no replacements.
I appreciate your post:-)
Happy New Year
nice post,thanks for sharing information!
I agree with your comment that agents should educate the clients. This raises one of the biggest PROBLEMS that in my opinion exists in the community association industry. That problem is that community managers control the insurance purchasing process in what seems to be the majority of situations. Property managers want to control the insurance purchasing process and more often than not prevent the insurance professional from getting in front of the board of directors. I will not address the various motivations or reasons for community managers to control this process and will leave that for another discussion. The board of directors has a fiduciary obligation. That obligation is to put the interest of the association above their personal interest to protect the association's assests. One of the requirements of the board is to depend on professionals where the obligation is beyond their expertise. The community manager, although knows a great deal about insurance requirements, is not an "insurance professional." An insurance professional is a "licensed" professional with his or her own errors and omissions coverage. A manager is not a licensed insurance professional. A board of directors should have a professional present the insurance program to the board in person each and every year. Although the manager can participate in the discussion, the insurance obligation is not something that should be deligated to a non insurance professional. There are no short cuts to this obligation. The association may also ask the manager if their errors and omissions policy (the managers) provides coverage for failure to maintain or obtain insurance. Many of those policies do not. A board should not rely on any professional that does not have its own professional liability coverage. The use of a professional is often only as good as its professional liability insurance. Associations should also be very cautious of management companies that provide insurance within their services as a revenue generating activity. If a management company has an insurance program, the question to ask is whether their insurance program fits all the very different communities within their portfolio. At the end of the day, the board's fiduciary obligation is not to buy the cheapest insurance to save its members money or increased fees, but to provide the best coverage to protect the association assets. Without face to face time with an insurance professional how does a board know whether it is getting the best coverage.