Here's a scenario that catches business owners off guard: Your building suffers fire damage to about 60% of the structure. Your insurance covers the rebuild cost—great news, right? Then the contractor delivers the bad news. Because of current building codes, you need to demolish the undamaged 40%, upgrade the electrical throughout, install new fire suppression systems, and bring everything up to 2024 standards. The extra cost? Another $200,000. Your standard policy? It won't cover a dime of those code-related expenses.
That's where ordinance or law coverage comes in. It's the safety net that protects you when building codes force you to do more than simple repairs. And if you own an older building, this coverage isn't optional—it's essential.
What Is Ordinance or Law Coverage?
Ordinance or law coverage is an optional endorsement to your commercial property insurance that covers the additional costs of complying with current building codes after a covered loss. Think of it as code compliance insurance—it bridges the gap between what your building was and what it must become under today's regulations.
Your standard commercial property policy covers rebuilding what was damaged. But when local ordinances require you to upgrade undamaged portions or use different materials and methods than your original construction, those extra costs fall on you—unless you have this coverage. Building codes evolve every three years through the International Code Council, meaning if your building is even a decade old, significant upgrades might be mandatory after any substantial damage.
The Three Parts of Coverage
Ordinance or law coverage typically includes three distinct components, each addressing a different code-related expense:
Coverage A: Loss to the Undamaged Portion. This covers the value of the undamaged part of your building that must be demolished because of code requirements. Say fire damages 60% of your building, but codes require you to demolish and rebuild the entire structure. This coverage pays for the loss of that untouched 40%.
Coverage B: Demolition and Debris Removal. This pays for the actual cost of tearing down and hauling away that undamaged portion. In one real-world example, demolition and debris removal alone cost $100,000—money the business owner would have paid out of pocket without this coverage.
Coverage C: Increased Cost of Construction. This is the big one. It covers the extra cost of rebuilding to meet current codes versus what it would have cost to rebuild as it was. Modern electrical systems, fire suppression, accessibility features, energy efficiency standards, seismic reinforcement—all those upgrades that weren't required when your building was constructed are covered here.
The Real Costs of Code Compliance
Code compliance isn't a minor expense—it can add 50% or more to your claim costs. A $500,000 rebuild can easily become $750,000 or more when you factor in modern building requirements. In one documented case, a business facing reconstruction would have been short $2.28 million without ordinance or law coverage. With the right endorsements, they were only out of pocket $30,000.
The older your building, the bigger the gap between what exists and what's required. A building from the 1980s might need completely new electrical service, HVAC systems designed for modern energy codes, ADA-compliant entrances and bathrooms, fire-rated walls and doors, sprinkler systems, and structural reinforcements for wind or seismic events. Each of these can run tens of thousands of dollars.
What surprises most business owners is that nearly 64% don't realize their standard insurance won't cover these code-related costs. They assume if the insurance covers the rebuild, it covers everything. It doesn't.
Coverage Limits and Costs
Ordinance or law coverage is typically offered as a percentage of your building's insured value—commonly 10%, 25%, or 50%. If your building is insured for $1 million, a 25% endorsement gives you $250,000 for code-related expenses. Some commercial policies include a small amount automatically, usually between $5,000 and $25,000, but that's rarely enough for significant losses.
The good news? This coverage is remarkably affordable. On average, you'll pay about $66 per year for every $40,000 of coverage. Increasing your property premium by roughly 30% can buy you substantial protection—in one example, adding about $7,500 to a $25,000 annual premium purchased $2.25 million in additional limits. When you consider the potential out-of-pocket costs, it's one of the best values in commercial insurance.
How much coverage do you need? Start by asking your contractor or architect what it would cost to bring your entire building up to current code if you had to rebuild after a total loss. That number—often startling—is your baseline. Most experts recommend at least 25% of your building value for buildings under 20 years old, and 50% for older structures.
Who Needs This Coverage?
If you own commercial property built more than 10 years ago, you need this coverage. Period. Building codes change constantly, and enforcement becomes strict after any significant damage. You're at especially high risk if you own buildings in coastal areas subject to updated wind resistance codes, earthquake zones with seismic requirements, historic districts with preservation rules, or properties that have been renovated piecemeal over the years.
Even newer buildings aren't immune. If local ordinances change—and they do—your five-year-old building might need updates after a loss. Commercial buildings with frequent code changes like restaurants, manufacturing facilities, healthcare offices, and multi-family properties face particular exposure.
How to Get Started
First, pull out your current commercial property policy and check your declarations page. Look for any mention of ordinance or law coverage, building code upgrade coverage, or law and ordinance endorsement. You might have a small amount included—often $10,000 or $25,000—but it's probably not enough.
Next, call your insurance agent and request a quote for ordinance or law coverage at 25% and 50% of your building value. Compare the premium increase to your potential exposure. Ask your local building department what major code changes would apply to your property type if you rebuilt today. This conversation alone is eye-opening.
Finally, document your decision. If you choose not to buy the coverage after reviewing the costs and risks, at least you made an informed choice. But for most commercial property owners, especially those with older buildings, the premium is a small price to pay for protection against a six-figure surprise. Your business survived the fire, storm, or other disaster. Don't let building codes be the thing that puts you under.
