Code compliance or ordinance and law exclusions in property insurance policies are intended by insurers to prevent damage claims turning into windfalls for policyholders.  These cases are often hotly debated by both sides.  From the perspective of the policyholder, the insured wants coverage to return the house or building to the same or similar use as before the catastrophe that occurred. 

Insurance companies on the other hand do not want to pay for expensive upgrades to the property as a result of changes in building codes and ordinances that have been implemented over numerous years from the time the structure was originally built.  The debate was blogged about recently in the property insurance coverage law blog.  Oklahoma addressed the question about five years ago.

In Spears v. Shelter Mutual Ins. Co., 2003 OK 66, 73 P.3d 865, lightning struck the Plaintiffs’ home and caused damage to part of the electrical wiring.  The home and its wiring were about 60 years old, the entire house had to be rewired to meet the current code construction adopted by municipal ordinances.  Shelter Insurance paid $1,700.00 to repair the portion of the wiring directly damages by the lightning, but refused to pay the additional $4,280.00 to rewire the entire home.  The Oklahoma Supreme Court stated:

¶4 Oklahoma law governing insurance coverage disputes is well-established. The foremost principle is that an insurance policy is a contract. Cranfill v. Aetna Life Ins. Co., 2002 OK 26, ¶5, 49 P.3d 703, 706. "Parties are at liberty to contract for insurance to cover such risks as they see fit and they are bound by the terms of the contract. It necessarily follows that courts are not at liberty to rewrite the terms of an insurance contract." Id.

In concluding its decision, the Oklahoma Supreme Court declared the ordinance or law exclusion was not ambiguous.  Neither was the exclusion hidden in the policy’s provisions or masked by technical or obscure language.  The court determined the plain and ordinary meaning of the words used in the exclusion required Shelter’s limit of liability to be $1,700.00 (the cost to repair the section of wiring directly damaged by the lightning).

Many companies actually sell additional coverage as an option for policyholders in which supplemental coverage is provided for necessary upgrades.  Although it increases the cost of the premium, it is usually fairly insignificant as compared to the risk of the expense for the upgrades if many years have passed from the time of construction. 

At the end of the day, it is an economic or marketplace decision between the seller of the insurance and the purchaser of the coverage.  If the property owner wants to spend less money on insurance coverage by not purchasing the additional coverage for code upgrades, it is an economic decision.  Likewise, if an insurance company chooses to structure its product so as to make coverage available at an increased cost, it is an open and free marketplace.