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Catastrophe Risk Management

Homeowners Law and Ordinance Coverage Challenges

John E Putnam , Aaron Lunt | February 9, 2024

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Wildfire in the mountains near a neighborhood

When working with customers to customize insurance coverages to their needs, how often do you discuss the law and ordinance (L&O) exposure and coverage limits with them to help them evaluate their need for this coverage? What training have you had regarding the real-world application of this important coverage, especially in catastrophe-prone areas? Why does it matter? This coverage has taken on a whole new role as an additional tool to minimize underinsurance, especially in natural catastrophe recoveries.

This article will share the author's frontline continual learning on the importance of L&O coverage to customers following wildfires based on experience gained in the aftermath of three Colorado wildfires.

Colorado Wildfires

At the time of the first Waldo Canyon Fire on June 26, 2012, I had virtually no experience with this coverage except for studying about it for various professional courses and for my agent's license. My lasting impression from these studies was that L&O coverage only applied to older building losses to bring them to the current codes. In my prior 30 years of agency experience, I only had the following.

  • One total loss that fortunately was written on a guaranteed replacement basis, so L&O was not a factor; and
  • One partial loss on an older residence (75 years) written on a basic dwelling policy where the adjuster deducted the cost of upgrading the electrical system due to code changes.

My learning curve was about to change when the Waldo Canyon Fire swept into a Colorado Springs residential neighborhood and destroyed 347 homes in a matter of hours. My involvement with helping the fire survivors to recover from this horrific event became a laboratory for real-life learning on how L&O coverage works.

Within 2 days after the neighborhood fire was extinguished, I was recruited by the team leader to serve in the following roles on the Colorado Springs Together recovery team in my capacity as a semiretired agent with no insurance company conflicts and 44 years of insurance experience.

  • To assist the team with the many insurance issues that arise following such a disaster starting with debris removal and continuing with many other consequences; and
  • To facilitate the neighbors' recoveries from their losses by helping them understand their insurance protection and by helping them navigate the insurance claims process.

Essentially, I performed as an insurance ombudsman, working with insurance and community leaders to facilitate the recovery from this fire.

Homeowners L&O Coverage

No two insurance policy forms are the same, so it is critical that insureds and their agents fully read their policy to make sure they understand what they are selling, interpreting, or buying. However, the language in the policies reviewed to perform this consultative task were quite similar.

This is how L&O coverage typically works within the policy and what coverage is granted in most forms.

  • L&O coverage is totally excluded under the exclusion section of a homeowners policy. However, under the insuring section, an additional insurance clause grants 10 percent of the Coverage A Dwelling Limit to be used as additional insurance for three listed situations.
  • The most important purpose in a wildfire claim setting is to provide coverage for increased costs of construction due to various code changes.
  • A second usage involves claim situations where there is a partial loss to the dwelling where local codes require the total demolition to rebuild. In the three fires on which I worked, this coverage grant was never applied.
  • Finally, if local building codes required the demolition of a portion of a dwelling to rebuild the remaining structure, this additional coverage would apply in that situation too, but this circumstance did not present itself in these fire recoveries.
  • This additional coverage only applies to those insureds who replace their homes. Insurers differ on when to make this payment. Some pay it at the time that the insured has a signed contract to rebuild. Others pay it either incrementally during construction or upon completion.
  • Finally, this additional insurance grant has two exclusions. First, it will not pay for any diminished value in the home. Second, this clause does not intend to cover the cost to test for or remove pollutants, which are defined. This was not an issue when the dwellings were destroyed even though there may have been pollutants in the homes before they burned.

There was one example where the L&O clauses differed that only applied to the Waldo Canyon Fire recovery. One insurer's policy required the codes to be in effect at the time of the loss. The remaining policies required the codes to be in effect at the time the dwelling was rebuilt.

There are several initial takeaways from a first glance at this policy language.

  • It is additional coverage, so it is only triggered for claims that exceed the dwelling limit. A large challenge for all parties to the insurance transaction is estimating the cost to comply with those laws or ordinances.
  • The base policy generally provides 10 percent additional insurance with no additional charge. If that amount needs to be increased, most insurers can endorse higher amounts to reflect state mandates or estimated additional coverage needed, but this increase must be requested by the agent or customer. Agents should make sure of the limits their states may have mandated and document that this minimum was offered.
  • The term "law and ordinance" is not defined in the policy. Essentially, it grants coverage to any law, ordinance, codes, or zoning rules that may affect the replacement of covered dwellings. Generally, these codes are local or state-based and are not included in standard tools used to determine replacement values, so agents and their customers need to identify laws that may affect them and try to determine the costs to comply. This is a very difficult task.

Waldo Canyon Fire—L&O Lessons

The Waldo Canyon Fire burned into Mountain Shadows, in the northwest corner of Colorado Springs, backing up to the Pike-San Isabel National Forest. The following are some details.

  • Humans caused and started the fire on June 23, 2012, near a popular hiking trail in the national forest.
  • On June 26, 2012, the intensity of the fire caused a pyrocumulus cloud to form and, due to its instability, it collapsed, causing hurricane force winds to drive the wildfire into the Mountain Shadows neighborhood around 5 p.m.
  • By 10 p.m., the neighborhood fire was largely out after burning 347 homes to the ground.

There are three specific L&O coverage lessons learned during my tenure on the recovery team. Within the first 90 days, the local fire department was proposing new fire codes to rebuild the destroyed homes, which created anxiety among the fire victims because they feared these codes would add additional costs that would make their reconstruction more difficult. It also did not help to have one of the larger insurers in our state with language in their policy that restricted L&O coverage only to those codes in place at the time the fire occurred.

A sub team was formed to evaluate the costs of the proposed harden codes, which were basically limited to more ignition resistive roofing, stucco siding, Trex decking, and landscape rules keeping evergreens more distant from the residence. A member of the fire department, a building code official, a home builder, and I made up the sub team. At the initial meeting, the team identified which elements of the revised code needed to be costed and how insurance might cover these costs. Three community meetings were then scheduled to discuss the additional costs and insurance impact. Fortunately, the added costs were contained within the 10 percent L&O limit covered by most peoples' policies, and the large insurer agreed to include this in their rebuilding estimates.

Underinsurance is often an issue following natural catastrophe events due to the likelihood of totaled homes, but this condition also exists in many homeowners insurance policies too. Fortunately, underinsurance was less problematic following the Waldo Canyon Fire than I experienced in the two other fires discussed below.

One of the fire victims was concerned that she had an 8 percent gap between her dwelling/extended replacement coverage and her rebuild cost. She asked if her L&O coverage could close the gap. She indicated that her company adjuster could not determine how much she may have under this coverage. (Incidentally, this is almost universally true because the work to establish these costs is rather onerous, especially in the middle of natural catastrophe claims handling.) I suggested that she meet with the building department to determine the code changes. They spent 3 days going over all the code changes for the past 23 years and listed them in an Excel spreadsheet. I suggested that she ask her builder to cost each item based on her house rebuild estimate and to present it to her insurer. Her work paid off; she recovered the 8 percent gap difference in this additional coverage. Her work became the model used for many other neighborhood homes as well as for the future Black Forest Fire and Marshall Fire.

A final L&O coverage question arose later dealing with a poorly executed replacement value calculation that left an underinsurance gap. The insurance policy clause doubled the extended replacement and L&O coverage limits in the event of a natural catastrophe. Although it did not totally close the gap, it facilitated the insureds' ability to rebuild their home.

Lesson learned. Read your whole policy because there may be hidden coverage.

Black Forest Fire—L&O Lessons

The Black Forest Fire was human caused and burned almost 500 structures as it meandered from June 11–20, 2013, through an unincorporated part of El Paso County, about 20 miles northeast of Colorado Springs. The direction of the fire was largely determined by the shifting winds, and the vegetation was very dry due to an extended drought. While the fire district adopted various fire codes, the Black Forest is a forested, more rural community with widely dispersed homes.

The community was unable to organize a public-private recovery group as was done in the aftermath of the Waldo Canyon Fire, although for several months, three former insurance agents attempted to replicate the services that we had just completed for the city team. As a result, we were not as engaged in the inner workings of the recovery effort led by the county except for participation in a series of public meetings educating the fire survivors on the lessons learned over the past year.

Because the Black Forest Fire Rescue Protection District was smaller and existed in an unincorporated area, they had adopted one of the recent versions of the International Fire Code. Almost immediately after the fire was extinguished, discussions turned to which building and fire codes would be used. One of the areas in the International Fire Code called for the installation of sprinklers into the reconstructed homes at a cost of $30,000–$40,000 dollars. Already, the residents quickly began to understand their insurance policies and the large gaps in coverage. Remarkably, this set off quite a political conversation among the county commissioners, the sheriff, and the fire chief, who decided to revert to an earlier fire code version that did not mandate sprinklers. Crisis averted but not without significant initial anxiety among the survivors.

Since many of the builders in the Pikes Peak region had just gone through many rebuilds in the Mountain Shadows area, they were familiar with the basic L&O codes that would trigger that coverage in the homeowners policy. Our team was given permission to share the spreadsheet developed by the Mountain Shadows survivor, so there were few other questions on this subject for the duration of our involvement in this fire's aftermath.

Lesson learned. Building codes can be very political when they are not properly communicated to the community.

Marshall Fire—L&O Lessons

This human-caused, wind-driven mega fire burned almost 1,100 homes in 8–12 hours in two incorporated upscale suburban towns in Boulder County, Colorado, and unincorporated Boulder County as well. Although the winds were not precisely recorded in the fire area, the surrounding weather stations recorded winds between 90–100 mph, which drove this fire into these neighborhoods.

Their rocky recovery journey began very soon after the fire on December 30, 2021. Because this fire happened before the New Year's Day weekend, the recovery effort was delayed. Once started, the recovery was led by the Boulder Emergency Management office and community-elected leaders in the two incorporated towns. These various groups faced daunting early decisions involving the best practices for organizing the recovery effort, how to handle the debris removal, and what versions of the building codes would apply to the rebuilding effort. Within a very short period, residents discovered a very serious underinsurance problem with most of their policies.

We prepared a proposal for the Boulder County team to provide mostly virtual assistance with individual survivors. An expanded team of four was organized and trained in July and early August. We talked with the first survivor, a severe smoke claim, in late August. These services continued until April 2023.

Because we were distant from the action, communications with the community departments leading the recovery were generally very fragmented. To fill this gap, we relied on the Denver/Boulder press articles, an occasional town meeting that the insurance commissioner held, and news from the residents who we assisted. By the time we were deployed, each of the towns and county had made a political decision to suspend the most recent building code requirements mandating that new home construction incorporate net zero design into all new and rebuilt homes.

Quite simply, net zero codes were implemented to reduce the carbon footprint of these new homes: energy used equals energy created. In the Colorado context, this usually means developing wind or solar energy to create energy and using very energy-efficient appliances and maximum insulation to minimize usage. While this is considered a socially conscious goal in normal times, it does not work well in a wildfire recovery where most homes are underinsured and there are limited resources to pay for these extra code requirements. The residents understood this economic reality and petitioned their public officials to back off these codes.

Like the other fires, the confusion surrounding the application and cost of the building codes was a continued theme in the Marshall Fire. Due to the significant underinsurance, the survivors needed certainty on the amount payable under their L&O coverage to determine how to close the underinsurance gap so they could rebuild. One town used our Waldo template and had a college student review the codes during the summer of 2022 to adapt our spreadsheet to its current codes. The other two entities were going to have a contractor help with the effort, but our team never received nor observed a finished product. Bottom line: there continued to be confusion about how much the codes would yield in an additional claim and when payments would be made.

This uncertainty delayed rebuilding the community because those persons who were underinsured relied on these figures to apply for Small Business Administration low interest loans as well as some state grants and other loans. Some insurers were more forthright in providing this data than others who insisted that they needed to have evidence of the home being replaced, which depended on providing the figures. These snafus were just one more factor that delayed the recovery of these destroyed homes.

In early December 2023, I noted an Xactimate (construction cost estimate tool) home replacement scope of loss for one of the survivors that included an estimate for the applicable codes for their house. The insurer paid these costs up front. Perhaps the insurance industry finally recognized the need to have a better process to facilitate the adjustment of similarly destroyed homes.

The Evolving Real World Building Code Realities

Assuming scientists are correct, how will the projections for the increased frequency and severity of natural catastrophes impact the L&O additional insurance coverage? How will the insurance industry and its customers be impacted? In the near term, three impacts will have a greater impact on building codes and zoning.

First, for catastrophe-prone areas, the building and fire codes will likely increase to "harden" or make more resilient structures to withstand the various perils aggravated by climate change. Certainly, this mitigation effort is important to all stakeholders, but there needs to be more transparency in the cost impact of these hardening codes. In addition, it would be very beneficial if all stakeholders outside the insurance industry—fire departments, home builders, building departments, governmental officials, etc.—were communicating and sharing insights to develop the best practices for fire mitigation as a matter of good public policy.

Second, the existence of "net zero" codes in all three Marshall Fire political entities is likely the tip of the iceberg that is about to descend on the insurance industry unless it becomes more involved in building code development and costs and determining affordable mechanisms to pay for them. Recently, I learned that there is an International Energy Conservation Code that suggests "net zero" codes that serve as a model for developing codes to reduce the world's carbon footprint. In addition, I just became aware of a Colorado law passed in 2022 whose purpose is to develop "net zero" codes in some manner (i.e., a state code for smaller entities and guidelines for larger entities to follow with the goal to reduce carbon emissions in the future).

Certainly, these codes have a lofty purpose, but who in the insurance industry has addressed the cost of implementing them in a post-natural-disaster recovery or identified prospective costs to do this so insurance consumers with their agents' help can properly assess their coverage needs?

Finally, in some areas of the country, there is speculation that zoning laws may further develop to identify vulnerable areas in communities to the major damaging catastrophes with two purposes: to limit growth in these areas and to restrict the rebuilding of structures on those properties if they have a high exposure to loss. While this is likely more problematic initially to those communities with a high flood exposure and perhaps to certain wildland urban interfaces, how will the L&O coverage adapt to cover the higher costs to rebuild on less available (therefore, more expensive) land?

In the past, this has not posed a big problem due to the plentiful land on which to rebuild. Since most zoning is done at the local level, how do these decisions get translated into solid information for the insurance consumers in those jurisdictions, and what insurance products or coverages will be necessary to fund these increased costs?

The first two impacts already exist. The third is a bit more speculative at this time, but I have seen indications that these zoning changes may occur as a mitigation tool to reduce losses.


When I volunteered to serve on the Colorado Springs Together recovery team, I didn't realize how immersed I would become in the mechanisms of insurance policies and how they work in the real world following a natural catastrophe. Nor did I expect this experience to be useful in two additional recoveries. Besides a sense of helping the residents through such a horrific event, I was treated to a real-world learning laboratory that continues to expand. My experience with the L&O additional insurance clause is only one of several insights about how the homeowners insurance policy works in post-disaster-recovery.

Based on my wildfire recovery experiences dealing with the L&O issues, I offer the following recommendations about improving both the policy, insurance adjusting practices, and industry education on the evolving role of codes in our society.

  • The 10 percent automatic L&O additional insurance should be increased to a percentage that more accurately reflects the evolving importance of codes to both harden structures and to reduce carbon emissions. What is the correct increase? Frankly, there is very little published guidance about the effect of codes, so it is difficult to assess either the proper automatic percentage or increases by endorsement. The insurance industry needs to become more transparent about real exposure costs so the agents can best represent them to their customers. In addition, this information should help to minimize the growing underinsurance problem that these disasters reveal.
  • Following a loss, either individual companies and/or an industry group needs to identify the local codes that will impact a given disaster's claims resolution. Ideally, the local building departments, fire departments, and home builders need to agree on these codes too, so adjusters and builders can provide policyholders with "real figures" in a shortened time frame (i.e., 90 days). This accelerated time frame will help to identify any areas of underinsurance due to codes, and policyholders can apply for low interest loans to fill any gaps.
  • Insurance educators need to supplement their training of L&O coverage with more details on the different types of codes and how to assess their impact in both the agency and adjuster realms.
  • If codes have the potential to impact the pricing of insurance products, the insurance industry, together with its regulators, needs to reach out to public entities to determine the impact of certain codes on insurance pricing and availability. While this process was not done formally following the Waldo Fire, community stakeholders developed the costs for the proposed "hardening" codes. While it would be preferable to do this on a local level, this process likely needs escalation to the state level because not every community has established groups to make these determinations.
  • After a major natural catastrophe, insurers and involved stakeholders should prepare some type of after-action report that discusses challenges they faced in the recovery process and make recommendations for further changes. This practice is already undertaken by first responders, so a process of continual improvement and future training needs are addressed.

Recognizing that these recommendations result from wildfires, any of them fit loss environments where you have multiple total losses. It is also possible that some of these recommendations could utilize artificial intelligence and other technological solutions. However, my underlying goal is to properly prepare agents and adjusters to better serve their customers when facing such situations.

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