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 ISO's HO 00 03 Special Homeowners Form. Increased coverage can be added by ISO's HO 04 77 Ordinance or Law Increased Amount of Coverage, which 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) issued 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.
The new rules implemented by the adoption of Emergency Regulation 22-E-15 are as follows:
1. Insurers are required to pay based on the terms of the policies in force and for amounts incurred by insureds to rebuild their homes. This includes any applicable optional coverages, including ordinance and law. 2. Insurers are required to pay insureds for ordinance and law coverage based on the insured's costs to rebuild to applicable building codes in effect on the date of loss for insureds within unincorporated Boulder County, and the cities of Louisville and Superior, subject to coverage limits. 3. If an insured chooses to use earlier building codes as allowed by the local government, insurers will provide coverage for rebuilding costs for those portions of the building codes in effect as of the date of loss as selected by the insured subject to coverage limits.
4. If the insured wants the Dwelling Unit Fire Sprinkler Systems installed with the rebuild and the system is required under the building code in effect at the date of loss, the insurer will provide coverage for the cost of the unit subject to coverage limits and ordinance and law coverage in the policy.
5. Insurers are not to interfere with an insured's decision to rebuild in whole or part in accordance with a prior building code. This includes determination of coverages and policy limitations – insurers may not try to sway an insured's decision in the repair options of the property.
6. A violation of this new rule may constitute an unfair claims settlement practice under C.R.S. 10-3-1103 and 10-3-1104(1)(h).
The adopted emergency 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 implemented this regulation 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 was adopted and made effective on August 22, 2022.
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.