The typical scenario thought of for ordinance or law coverage in a property policy to apply is when the majority portion of a building is damaged by a covered cause of loss and rather than allow for the rebuild or repair of the damaged portion of the building, local ordinance or law requires the building owner to demolish the undamaged portion of the building and rebuild the building new up to current code. There are other scenarios, however, where ordinance or law coverage could be triggered, even from a relatively insignificant damage, as demonstrated by a federal appeals court in Minnesota ruling just yesterday.
A mall owner suffered a little over $23k in damages to the roof a shopping center as a result of a tornado. The insurer contended that the roof was already water-damaged before the tornado hit; however, upon applying for a building permit to make localized repairs to the part of the roof that was damaged by the tornado, local officials denied the request by the mall owner, finding that the Minnesota Building Code prohibits partial repairs to water-damaged roofs. The court determined that since the tornado damage is what caused the owner to apply for a building permit that was denied and triggered the code to mandate a full roof replacement, and since tornados were a covered cause of loss under the policy and none of the policy exclusions under ordinance or law coverage were applicable, the carrier is responsible to cover the complete cost to replace the roof under the ordinance or law coverage afforded by the policy.
For those policies that exclude ordinance or law coverage or contain an inadequate sublimit of coverage for coverage A of ordinance or law, that can ultimately prove to be a disaster for the insured. In the MN case, for example, where most of the roof was not damaged by the tornado and approximately suffered only $23k of damages, without full building limits for coverage A or a healthy sublimit, the actual cost to replace the roof, which was in excess of $1.3M, would not have been covered.