Understanding Code Upgrade Coverage: Why Your Insurance Might Not Pay for Rebuilding to Current Standards
When disaster strikes—whether it’s a wildfire, a hurricane, or any other catastrophe—many people assume that their insurance policy will cover the full cost of rebuilding their home or business. But what happens when building codes have changed since the original structure was built? Unfortunately, many property owners, like the camp for mentally disabled adults that recently spoke at my Rotary meeting, find themselves facing an unexpected and costly reality.
Their camp was lost in a fire several years ago, and while their insurance policy covered the rebuild, it did not cover the necessary septic upgrades required to meet new building codes. This gap in coverage left them struggling to fund the difference, delaying their ability to rebuild and resume their mission of serving the community.
So, how can you protect yourself from the same situation? The answer lies in ordinance or law coverage, often referred to as “code upgrade coverage.”
What Is Ordinance or Law Coverage?
Most insurance policies cover replacement cost, which means they’ll pay to rebuild your structure to the condition it was in before the loss. However, if your home or business was built under old building codes, your insurance may not cover the cost of updating to new requirements—unless you have ordinance or law coverage.
This type of coverage ensures that when a building is destroyed, it will be rebuilt to meet current codes, covering costs such as:
- Electrical Upgrades – If your building had knob-and-tube wiring, your insurance would typically only pay for replacing it with the same outdated system—unless you have code upgrade coverage, which would cover modern electrical updates.
- Plumbing & Septic System Updates – Like the camp’s situation, if your new build requires a different septic system due to updated environmental regulations, this coverage could help offset that cost.
- Energy Efficiency & Accessibility Updates – New regulations may require buildings to meet certain energy efficiency or ADA compliance standards, which can be significantly more expensive than the original construction.
Why Isn’t Code Upgrade Coverage Automatically Included?
Many standard insurance policies don’t include ordinance or law coverage because they are designed to return the insured to their previous state—not to pay for government-mandated improvements. Adding this endorsement to your policy may slightly increase your premium, but it can save you tens of thousands of dollars in the event of a total loss.
How Much Coverage Do You Need?
Ordinance or law coverage is typically broken into three parts:
- Coverage for the Undamaged Portion of the Building – If only part of your building is damaged but local regulations require you to demolish and rebuild the entire structure, this helps cover those costs.
- Demolition Costs – If your structure must be torn down due to new building codes, this covers the cost of demolition.
- Increased Cost of Construction – This is the most important piece when it comes to code updates, covering the added expense of rebuilding your home or business to current regulations.
Who Needs This Coverage?
If you own an older home, business, rental property, or nonprofit facility like the camp that burned down, you should absolutely review your policy for ordinance or law coverage. The older the structure, the greater the risk of costly code updates during rebuilding.
What Can You Do Now?
- Review Your Current Policy – Don’t assume you have code upgrade coverage—many policies don’t include it unless specifically added.
- Talk to Your Insurance Agent – They can help you determine how much ordinance or law coverage is appropriate for your property.
- Consider Your Property’s Age and Location – If you live in an area prone to wildfires, hurricanes, or other disasters, upgrading your coverage is a smart financial decision.
Final Thoughts
The camp’s story is a heartbreaking example of why understanding your insurance coverage before disaster strikes is so important. While their insurance covered much of the rebuild, it did not account for the new septic system requirements, leaving them to fund the upgrades out of pocket.
If you’re unsure whether your policy includes ordinance or law coverage, now is the time to check. A quick conversation with your insurance agent could mean the difference between a smooth rebuilding process and a financial nightmare.
Not sure where to start? Give us a call today, and we’ll review your policy for free to make sure you’re fully protected.
Bancorp’s insurance agents are available to provide you with a free review and consultation. Contact Us – Bancorp Insurance Call 800-452-6826
