Understanding Building Ordinance Coverage for Property Redevelopment
When a covered loss damages your older rental property, you expect your insurance to pay for repairs and restoration. What many investors don't expect is the bill for mandatory building code upgrades—potentially tens of thousands of dollars in additional costs that standard insurance policies don't cover. Building ordinance coverage fills this critical gap, and for owners of older properties, it's essential protection.
What is Building Ordinance Coverage?
The Code Upgrade Problem
Building codes evolve constantly, addressing new safety concerns, accessibility requirements, energy efficiency standards, and construction best practices. A building that was code-compliant when built may now be significantly out of compliance with current codes.
When you repair or rebuild after a covered loss, you may be required to bring the entire building—not just the damaged portion—up to current codes. Standard property insurance only covers restoring the building to its pre-loss condition, leaving you responsible for the code upgrade costs.
What Building Ordinance Coverage Protects
Building ordinance and law coverage (also called code upgrade coverage or law and ordinance coverage) typically provides three types of protection:
Coverage A: Undamaged Property Coverage
- Covers the loss in value of undamaged portions of the building that must be demolished to comply with codes
- Example: If a fire damages 40% of your building, but code requires demolition of the entire structure, this coverage pays for the undamaged 60%
Coverage B: Demolition Cost Coverage
- Pays the cost to demolish the undamaged portions of the building
- Includes debris removal from code-required demolition
Coverage C: Increased Cost of Construction
- Pays the additional cost to rebuild to current code standards
- Covers upgraded materials, systems, and features required by current codes
- The most commonly needed portion of the coverage
Why This Coverage Matters for Investment Properties
Common Code Upgrade Requirements
After a loss, you may face requirements to upgrade:
- Electrical systems: Modern wiring, GFCI outlets, updated panels
- Plumbing: Lead pipe replacement, updated fixtures
- Fire safety: Sprinklers, fire-rated doors, smoke detection systems
- ADA accessibility: Ramps, accessible bathrooms, wider doorways
- Energy efficiency: Insulation, windows, HVAC efficiency standards
- Structural: Seismic retrofitting, wind resistance
Real Cost Examples
Code upgrade costs can be substantial:
- Fire sprinkler system installation: $3,000-$10,000+
- Electrical system upgrade: $5,000-$20,000
- ADA bathroom renovations: $10,000-$30,000 per bathroom
- Energy code compliance: $5,000-$15,000
- Complete code upgrade for older building: $50,000-$200,000+
When Coverage is Triggered
Building ordinance coverage typically applies when:
- The building suffers damage from a covered peril (fire, storm, etc.)
- Repairs or rebuilding trigger code enforcement requirements
- Local ordinances require upgrades as a condition of permits
Many jurisdictions require code compliance when repairs exceed a certain percentage of building value (often 50%).
Who Needs This Coverage?
Highest Priority
- Owners of buildings more than 20-30 years old
- Properties in jurisdictions with stringent or recently updated codes
- Historic buildings with significant non-compliance
- Properties with outdated electrical, plumbing, or fire protection systems
- Buildings in seismic zones without seismic retrofitting
Moderate Priority
- Buildings 10-20 years old
- Properties partially updated but with some non-compliant systems
- Commercial or mixed-use properties with higher code requirements
Lower Priority (But Still Consider)
- Newer buildings that are already code-compliant
- Properties in areas with minimal code changes
How to Get Building Ordinance Coverage
Policy Options
Building ordinance coverage is typically:
- An endorsement added to your property insurance policy
- May be included automatically in some commercial policies
- Usually has a separate limit (10-25% of dwelling coverage is common)
Coverage Limits
Choose limits carefully:
- Standard limits may be insufficient for older properties
- Consider a professional assessment of potential code upgrade costs
- Higher limits are available for additional premium
- Balance cost against realistic exposure
Cost Considerations
Building ordinance coverage is generally affordable relative to the protection provided. Typical cost is 2-5% of the base property premium for meaningful coverage limits.
Illinois-Specific Considerations
Illinois investors should be particularly aware of:
- Chicago building codes: Among the most stringent in the country, with frequent updates
- Fire safety requirements: May require sprinklers, fire-rated doors, and detection systems
- Energy codes: Illinois has adopted energy efficiency standards that affect renovations
- Accessibility requirements: ADA compliance may be triggered by substantial renovations
Conclusion: Essential Protection for Older Properties
Building ordinance coverage is one of the most important endorsements for owners of older investment properties. Without it, a covered loss could leave you facing tens of thousands of dollars in unexpected upgrade costs—turning an insurable loss into a financial crisis. The modest cost of this coverage is a small price to pay for protection against a potentially devastating gap in your insurance protection.
Review your current policies to confirm you have this coverage, and ensure limits are adequate for your properties' potential exposure. For more guidance on comprehensive property protection, explore our coverage types guide and Insurance 101 for investors.