Florida 2-20 General Lines Agent (Property, Casualty, Commercial Lines and Florida Law)Property InsuranceHard
A client operates a commercial business and has a Building and Personal Property (BPP) Coverage Form. Their building was recently upgraded with a new, highly efficient HVAC system costing $50,000. This upgrade significantly increased the building's value. The policy has an Ordinance or Law exclusion. If a covered fire completely destroys the building, and local building codes require a more expensive, environmentally friendly HVAC system (costing $70,000) be installed during reconstruction, how much of the $70,000 cost for the new HVAC system would generally be covered under the standard BPP policy, assuming no endorsements?
- A$50,000
- B$70,000
- C$0
- DThe difference between $70,000 and the original system's ACV.
Show answer & explanationAnswer & explanation
Correct answer: A. $50,000
A standard BPP policy with an Ordinance or Law exclusion will only pay to replace the damaged property (the original HVAC system) with like kind and quality, up to its replacement cost or actual cash value, whichever applies. It will not cover the increased cost due to updated building codes ($70,000) beyond the value of the original system ($50,000). To cover the additional $20,000, an Ordinance or Law endorsement would be needed.
Why the other options are wrong
- B. This would only be covered if an Ordinance or Law endorsement was added to the policy.
- C. This is incorrect; the original HVAC system's value would be covered.
- D. While ACV might be considered for older systems, the question implies a 'new' system, making replacement cost more likely for the original, but the core issue is the ordinance or law exclusion, not ACV vs. RC calculation for the original.
Ordinance or Law Exclusion
A standard exclusion in property insurance policies that removes coverage for increased costs of repair or reconstruction due to the enforcement of building codes or ordinances.
- Excludes costs for code upgrades during rebuild
- Only pays for 'like kind and quality' of original structure
- Can be added back via an Ordinance or Law endorsement
Memory trick: Exclusions limit what's covered; Ordinance or Law means no code upgrade costs.