The Expert Podcast

Anytime there's any kind of natural disaster or even an individual damage to a property, a lot of times the subject goes to, "Well, how am I going to file for insurance? What's going to happen to my home value?" Well, here's something that's often overlooked. There is a term in insurance contracts called ordinance of law.

What that means is if you have a house that was destroyed by a fire, a hurricane, or some other type of disastrous event, you're going to file an insurance claim. Your home will have been valued based on certain criteria. For example, if you have a 2,000-square-foot home, they're going to determine how much per square foot it costs to build it and assign a certain dollar amount.

However, you might find that the amount given by your insurance company won't be enough to rebuild your house in the current market. While you might theoretically be able to rebuild a similar house to the one you had before, building laws may have changed. Permitting, zoning, and different construction requirements could now apply—such as needing additional bracing, fireproofing, or more advanced electrical systems.

The rules and laws that were in place when your house was built have likely changed in the last 15, 20, 30, or even 40 years. So, your new house will need to be updated and upgraded to meet current standards. If your home is destroyed, you might have to cover the difference between what your insurance pays and what it actually costs to rebuild.

This is where this article comes in, discussing how the equity in your home could be lost. For example, if you had a house worth $500,000 with a $250,000 mortgage, you had $250,000 in equity. However, your insurance company might only pay $300,000 for the rebuild, meaning you could have to contribute an additional couple hundred thousand dollars to bring it up to code. Sometimes, this includes installing a new septic tank, upgrading utilities, or even laying a new foundation.

Remember, part of the value of your home is also in the lot, and since your land isn’t destroyed, insurance won’t cover that. They will only provide funds to rebuild the structure itself. This is why reviewing your insurance policy for ordinance of law coverage is crucial. You may want to upgrade your policy so you can rebuild according to current standards, rather than outdated ones. In many cases, you won’t even be allowed to rebuild using older standards, and if you could, you’d end up with an outdated house in a modern neighborhood.

Anytime you file a claim, you should expect some losses. There are numerous exclusions in coverage, in addition to your deductible, which you must pay out of pocket. Other uncovered expenses may include debris removal, toxic waste cleanup (such as from a fuel tank spill), or replacement of personal belongings beyond a certain limit. Understanding your coverage details in advance allows you to plan accordingly—whether by setting aside extra funds or purchasing additional insurance.

Don’t go in blind. Know these things before an event happens. Once you have a claim, you can’t change your coverage. Ordinance of law is an important term—ask your agent or broker about it.

If you’d like to consult with one of our licensed agents, we can help. Our experts include licensed private investigators, commercial insurance brokers, certified real estate title examiners, civil court mediators, and even licensed general contractors. If you need guidance in any of these areas, click the link below at actualhuman.com to arrange a live, one-on-one consultation. We'd be happy to assist you.