Building Ordinance Coverage is coverage for losses caused by ordinances or laws that govern the construction and repair of damaged buildings. Damaged old structures may require electrical upgrades; heating, ventilation and air conditioning (HVAC); roofing materials; fences; and plumbing units based on area codes. Many communities have building ordinances requiring that a building that has been damaged to a certain extent (usually 50 percent) must be demolished and rebuilt to current building codes rather than simply repaired. Unapproved standard forms of commercial real estate insurance do not cover the loss of an intact part of a building, the cost of demolishing that undamaged part of a building, or the increased cost of restoring the entire structure to current building codes. However, coverage for these losses is widely available by endorsement. Standard homeowner policy includes a provision providing a limited amount (eg, 10 percent of the residential limit) of building ordinance coverage; this amount may be increased by endorsement.
Insurance is a contractual relationship that arises when one party (the insurer), for a fee (premium), agrees to compensate the other party (the insured) for losses caused to a certain subject (risk) caused by certain unforeseen circumstances (hazards or dangers). The term ‘guarantee’, commonly used in England, is considered synonymous with ‘insurance’.
The 10/10 Rule is a matter of analyzing and demonstrating the transfer of risk as a precondition for the use of reinsurance accounting, which was codified in the early 1990s with the adoption of Financial Accounting Standard (FAS) 113 (and its statutory counterpart, SSAP 62). FAS 113 itself was a response to alleged abuses and set the standard for testing whether something should be called an insurance contract. FAS 113 required that the transfer of risk be demonstrated by comparing the present value of the cash flows associated with the contract and, in particular, by exceeding certain thresholds of “significance” of risk. The thresholds, often referred to as the 9a and 9b tests, are: 9a. The reinsurer assumes significant insurance risk under the reinsured parts of the underlying insurance contracts. 9b. It is possible that the reinsurer could suffer a significant loss from the transaction. While neither “significant” nor “reasonably possible” was defined in this context, standard rules of thumb quickly emerged in the implementation of FAS 113. The most commonly cited is the “10/10 Rule”. This rule states that a contract reaches a threshold if there is at least a 10 percent chance that it will suffer a loss of 10 percent or more in present value (expressed as a percentage of the contract premium ceded).