The Marshall Fire that burned through Boulder County, Colorado in December 2021 destroyed more than 1,000 residential and commercial buildings. The main cities affected by the fire, Louisville and Superior, have waived certain provisions of their respective building codes in order to ease cost concerns for homeowners trying to rebuild their lives. However, waiving the building codes, while well-intentioned, may do more harm than good.
Homeowners often have ordinance and law coverage within or added to their homeowner policies. This coverage provides payment for increased construction costs for repairs that must comply with building codes that weren't in effect at the time of original construction. In order for this coverage to be effective, there has to be an ordinance or law to comply with that creates the increased costs. For example, an insured's dwelling is totally destroyed and the policy limit is $250,000. The cost to rebuild the property and bring it up to current building codes is $270,000. This increased cost is covered under the ordinance or law coverage, which is ten percent of coverage A in the ISO HO 00 03. Increased coverage can be added by endorsement HO 04 77 that allows the insured to increase the percentage available for the coverage. Without the ordinance or law coverage, the insured would have a $20,000 bill for the difference between the policy limits and the amount to bring the building up to code. With ordinance or law coverage that $20,000 is covered as well. However, if the ordinances are waived, then that coverage does not apply.
By waiving the local building code ordinances, insureds are potentially put at risk of being unable to completely repair or replace their damaged structures as the funds available to pay for the upgrades required by the codes are available only when such codes are enforced. In light of this issue, the Colorado Division of Insurance (DOI) has drafted an emergency regulation requiring carriers to provide the ordinance or law coverage to insureds unless the insureds deliberately opt out of the building code requirements. There are separate parameters for homes in Superior and Louisville. For homes in Superior, if an insured opts out of the building code requirements, the insurer may only withhold the portion of coverage for the difference between the 2018 and 2021 building code costs if the underlying policy limit is enough to cover the 2018 building costs.
For homes in Louisville, again the insurer may only withhold the portion of coverage for the difference between the 2018 and 2021 building code costs if the underlying policy limit is enough to cover the 2018 building costs. If the insured requests that the fire sprinkler system be included in the rebuild the insurer is to cover the cost of the sprinklers subject to policy limits.
The proposed regulation prohibits insurers from interfering with an insured's decision to comply with portions of the building codes, including the use of coverage determinations or limits to assist in that decision-making.
Insurers are required to continue to make insured's aware of the impact their decisions to opt out of building code requirements may have on their coverages. Insurers have a variety of eligibility requirements, and compliance or noncompliance with current building codes could affect an insured when it comes to renewal. Insurers are required to answer insured's questions on availability, limitations, and exclusions found in their homeowners policies.
Violation of these requirements could be considered a violation of the unfair claims settlement practices regulations. Noncompliance with the regulation could result in the imposition of sanctions.
The department has proposed these regulations in order to protect insureds during a time of loss and to assure that they have access to all available funds from their insurance policies. The draft of the regulation is available for comment until August 1, 2022. Comments may be sent to this email: [email protected]
The waiver of building codes not only affects an insured's ability to rebuild his home, but can have lasting effects going forward. If an insured opts out of bringing the property up to code, his ability to sell that house later may be impacted as it may not pass inspection. The homeowner might have to accept an offer well below asking price to offset the buyer's costs in bringing the house up to code.