Exclusions for Losses Caused by Ordinance or Law

Following the Oakland Hills fire in California in 1993 and Hurricane Andrew in Florida in 1992, many people found themselves to be under-insured because of the ordinance and law exclusion in their HO policies. As a result of this exclusion, losses that occur as a result of laws or ordinance are not covered.

Many of the homes damaged by he Oakland Hills fire were built prior to the enactment of building codes designed to reduce losses from earthquakes. The difference between the cost of rebuilding according to code and the cost of rebuilding using the original type of construction materials and building techniques often was not covered because of the ordinance and law exclusion in the HO policy.

Similarly, many coastal areas including those in Florida require that new homes and homes that are more than 50 percent destroyed be built a certain number of feet above ground level. Following Hurricane Andrew the additional cost rebuilding according to this requirement was not covered under some people’s homeowner’s policies because of the ordinance and law exclusion..

The coverage is provided without regard to fault on negligence of the insured. For example, if a visiting child falls off of a swing and breaks an arm, the homeowners policy will cover medical expenses up to $1000.

Excluded Perils; Homeowners policies exclude coverage for a number of perils. One way this is done is through a named peril policy, which excludes coverage for all perils not named. In addition, named perils policies have specific exclusions to reduce ambiguity about what is not covered under the policy.

Examples of exclusions include property losses caused by intentional acts, normal wear and tear smog and animals owned or kept by the insured. These exclusions can be explained using the principles presented in earlier topics. Some exclusions reduce the insurer’s exposure to events that depend largely on the homeowner’s actions and therefore are subject to moral hazard. Other exclusions eliminate coverages for events that have a high probability of occurrence and little uncertainty and therefore would be too costly to insure once claims processing costs are considered. Homeowners policies also have exclusions that reduce an insurer’s exposure to correlated losses. Consumers can purchase coverage for some of these excluded perils though endorsement or through special government programs. We describe some of these coverages later in the next article.

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