The Public Adjuster's Guide to Ordinance or Law

Note: This guide is based on standard ISO commercial property forms. Always verify specific policy editions and carrier-specific language.

The difference between a basic repair and a functional total loss often comes down to a single policy provision: Ordinance or Law. This exposure stems from the gap between physical damage and regulatory enforcement. While an adjuster scopes the 40% of the building damaged by fire, the municipality frequently decides the fate of the remaining 60%.

If local code thresholds (once the building crosses the jurisdiction's applicable damage or alteration threshold) generally require the demolition of the undamaged portion, the "Replacement Cost" of the damaged area becomes a fraction of the true liability. On older stock, Ordinance or Law (O&L) is not just an add-on; it is the coverage that determines whether a partial physical loss becomes a functional total loss once permits, final inspections, or the Certificate of Occupancy (CO) enter the equation.

This guide covers the base policy limitations, the "Time Element" gap that shortens the indemnity period, and the specific ISO mechanics you need to leverage to trigger full coverage.

1. The "Base Policy" Limitation (CP 00 10)

Before reviewing the endorsements, you must check the base form to identify what is—and isn't— covered by default. Many adjusters see "Increased Cost of Construction" in the coverage summary and assume the exposure is addressed. However, the unendorsed Commercial Property Form (CP 00 10) typically includes a "built-in" limit that is inadequate for significant losses.

Commercial Limitations: The built-in coverage is typically limited to the lesser of $10,000 or 5% of the building limit. Crucially, it generally does not cover the value of the undamaged portion (Coverage A) or the demolition of undamaged parts (Coverage B) and is limited to increased construction costs on the damaged portion—it does not substitute for Coverage A or B under CP 04 05.

Residential Note: Be careful not to apply residential logic to commercial claims. Many ISO-based Homeowners forms build in ordinance or law coverage (often expressed as 10% of Coverage A). However, in commercial claims, that $10,000 base cap is often a rounding error on a major loss.

Field Reality: If you do not see CP 04 05 (Ordinance or Law Coverage) listed in the commercial endorsements, your client is likely relying on a minimal sub-limit that will not cover significant code-mandated work.

2. The Three Coverages: What's Actually Being Triggered

The CP 04 05 endorsement (and similar forms) subdivide the exposure into three coverages:

Coverage A: Loss to the Undamaged Portion

• What it is: Pays for the value of the undamaged parts of the building that must be destroyed due to code. Note: This coverage is typically included within the building limit, not provided as an additional limit.
• The Schedule Nuance: Unlike Coverages B and C which usually have specific dollar limits, Coverage A is often activated by a specific entry, checkmark, or "Included" designation on the endorsement schedule. If that section is blank or unchecked, you may have millions in coverage for "upgrades" (Coverage C) but zero coverage for the value of the wall you are forced to tear down.
• Argument Strategy: Carriers often argue there is "no loss in value" if the building was slated for repair. However, the counter-argument is clear: if a permit/CO is conditioned on code compliance, the "undamaged" portion has lost its functional value—until the upgrades are done, it is not a usable building.

Coverage B: Demolition Cost

• What it is: Pays to demo and clear the undamaged portions. Standard debris removal only covers the damaged property.
• The Exposure: Watch for low scheduled limits (e.g., $25,000). Demolishing an undamaged structural bay often exceeds token sub-limits.

Coverage C: Increased Cost of Construction

• What it is: Pays the delta to bring the system up to code.
• The Trigger: Unlike the base policy, this covers upgrades to undamaged portions if required by the ordinance.

3. Negotiation Leverage: "Demolition" vs. "Razing"

A frequent dispute involves Coverage B (Demolition) for interior work. Carriers may argue that "Demolition" implies razing the entire structure to the ground, denying coverage for interior tear-out.

The Counter (Using Case Law): If the code requires you to replace the wiring behind a wall, you must destroy the undamaged wall to access it. While jurisdiction-specific, persuasive case law like Ridgewood Bay Resort, Inc. v. Auto-Owners Ins. Co. (Minn. Ct. App. 2022) successfully argued that "demolition" is ambiguous and should include the "tearing out" of undamaged components (like drywall or cabinets) necessary to effectuate the upgrade. As always, the argument turns on the specific ordinance language and the policy's definition (or lack thereof) of "demolition."

Negotiation Strategy: When the carrier asserts "no demolition required," use this to force them to explain how Coverage C (upgrades) can be performed without the demolition (access) of the obstructing material.

4. The "Time Element" Gap (CP 15 31)

This is a critical exposure often missed during the initial scope. If a code upgrade adds six months to the repair timeline (due to permitting, architectural redesigns, or specialized labor), does the Business Income policy pay for that extra downtime? Usually, no. Standard Business Income forms (CP 00 30) explicitly exclude any increase in the "Period of Restoration" caused by the enforcement of an ordinance or law.

Required Endorsement: You need endorsement CP 15 31 (Ordinance or Law - Increased Period of Restoration).

Field Note: If this endorsement is missing, advise the client that lost income payments will likely stop when the "standard" repair time ends, rather than when the code-related work is completed.

5. Building the Record: Enforcement vs. Compliance

Older policy forms (and many proprietary forms that still use legacy language) often require the "enforcement" of an ordinance to trigger coverage. This led to delays where insureds had to wait for a formal violation notice.

The Shift: Modern ISO forms (generally post-2012 editions) shifted the insuring agreement to cover "enforcement of or compliance with" an ordinance or law. Even today, verify the form edition, as many carriers use proprietary forms based on older ISO text.

Action Plan: If you have "Compliance" language, do not wait for a denial letter. Build the record immediately using these three documents:

The 3-Document Record

• Code Consultant / Architect Letter: Identifies the applicable code sections and why the damage triggers them.
• Plan Review Comments: Documenting what the municipality requires to approve the permit.
• CO Requirement: Explicit confirmation that a Certificate of Occupancy will not be issued until specific upgrades are complete.

6. Advanced Traps & Tips (Beyond the Basics)

Even with the endorsement, specific exclusions and provisions can significantly reduce recovery.

The "Proportional Share" Limitation (Edition-Dependent) Certain CP 04 05 editions include proportional share language limiting payment when a loss is caused by both covered and non-covered perils.

• Coverage Gap: If a covered fire and non-covered flood both contribute to the damage, the carrier may reduce the O&L payment proportionally, or deny it entirely if the ordinance addresses the non-covered damage (e.g., flood elevation codes).

The "Pre-Existing Violation" Exclusion Carriers generally will not pay for upgrades if the building was already in violation before the loss and the insured failed to comply.

• Defense Strategy: Ensure the violation is "latent" or previously grandfathered. If there was an open citation on file before the loss, coverage for that item is likely excluded.

Pro-Tip: Demand Surge (CP 04 09) In the wake of a declared disaster, costs spike. The ISO endorsement CP 04 09 (Increase in Rebuilding Expenses Following Disaster) provides additional insurance for these surges—and explicitly allows up to 20% of that limit to be applied to Ordinance or Law Coverage C.

7. The Intake Checklist: 8 Questions in 8 Minutes

Avoid discovering gaps after the scope is set. Run this checklist at intake:

1. Base vs. Endorsement: Is there a CP 04 05 (or equivalent), or only the CP 00 10 built-in cap?
   • Impact: Determines if you have real coverage or a token $10k limit.
2. Coverage A: Is the coverage activated on the Schedule?
   • Impact: If unchecked/blank, you may have no recovery for the value of undamaged portions forced to be demolished.
3. Limits Check: Are Coverages B and C adequate for the scale of the building?
   • Impact: Prevents under-scoping demolition costs on complex commercial losses.
4. Trigger Language: Does the form language include "Compliance with" or just "Enforcement"?
   • Impact: Determines if you can trigger coverage proactively via permits or must wait for a violation notice.
5. Time Element Endorsement: Is there a CP 15 31, or is the client uninsured for code-induced downtime?
   • Impact: Critical for businesses that cannot survive an extended delay.
6. Form Edition: What version of CP 04 05 is on file?
   • Impact: Proportional share language may exist in certain editions, creating a minefield for ACC disputes.
7. Jurisdiction: Does the state have case law supporting coverage for interior demolition?
   • Impact: Many demolition disputes turn on whether "demolition" includes tear-out.
8. Surge Endorsements: Does the policy include CP 04 09 for disaster-related inflation?
   • Impact: Provides a second source of O&L Coverage C when costs spike post-event.
9. Pre-Loss Enforcement: Are any sections of the code already cited/violated pre-loss?
   • Impact: Excludes those upgrades from coverage.
10. Proportional Perils: Is the loss caused by both covered and non-covered perils?
    • Impact: May trigger proportional share reductions depending on form language.

Why This Matters for Policy Analysis

Ordinance or Law is not just a coverage; it is a multiplier. It determines whether a 40% loss becomes a 100% rebuild. Missing it at intake can transform a profitable file into a costly mistake.

Frontera surfaces O&L endorsements and their specific inclusions/exclusions immediately—so you see if Coverage A is missing, or if the limits are inadequate, before you've walked the site.