501.02D

Ordinance or Law Insurance

Requirements

You must ensure every PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). has ordinance or law insurance:

  • for all perils, even if insured on a standalone policy; and
  • if the PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code).
    • is non-conforming under any current land use law or ordinance, and cannot be rebuilt "as is", and/or
    • was constructed 25 years or more before DeliveryDeliverySubmission of all correct, accurate, and certifiable documents, data, and information with all applicable documents properly completed, executed, and recorded as needed, and any deficiencies resolved to Fannie Mae’s satisfaction. .

Ordinance or law insurance is not required if the:

  • PropertyPropertyMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). was constructed 25 years or more before DeliveryDeliverySubmission of all correct, accurate, and certifiable documents, data, and information with all applicable documents properly completed, executed, and recorded as needed, and any deficiencies resolved to Fannie Mae’s satisfaction. , but was substantially rehabilitated (i.e., all fixtures and building materials were removed down to the studs, then rebuilt to then current building codes); or
  • Mortgage Loan Origination DateMortgage Loan Origination DateDate you fund a Mortgage Loan to the Borrower. was before February 3, 2014 and the Property'sProperty'sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code).  characteristics are legally conforming, regardless of the build date.
Coverages If ordinance or law insurance is required, you must ensure the Property has all of the following...
Coverage A

Loss of Undamaged Portion, in an amount equal to

 

  • 100% of the Property'sProperty'sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). insurable value, minus the damage threshold specified by the local building ordinance, or
  • 50% of the insurable value, if the local ordinance does not specify a threshold.
Coverage B Demolition/Debris Removal Cost equal to at least 10% of the Property'sProperty'sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). insurable value.
Coverage C Increased Cost of Construction equal to at least 10% of the Property'sProperty'sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). insurable value.

Guidance

Examples of ordinance or laws include

  • bulk restrictions,
  • building,
  • zoning,
  • energy management,
  • green, or 
  • Fair Housing Act accessibility.

Rebuilding "as is" refers to the ability to build the same square footage within the same building footprint without increasing the non-conformity, as defined by the local ordinance.  You should determine the feasibility of rebuilding within any time frame required by the ordinance.

Ordinance and law insurance maybe needed, even if it is legally conforming under current zoning law, because the construction cost will likely be significantly higher due to changes in building codes and construction requirements.

Some municipalities have no zoning districts.  This primarily refers to use.  Usually, buildings are still subject to building and safety codes; therefore, coverage is required.

Required Limits Example
If... Then the required coverage is...

A Property's insurable value equals

 

  • $10 million, and
  • the damage threshold of the local building ordinance is 75%
 100% of the Property'sProperty'sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). insurable value, minus the damage threshold specified by the local building ordinance (i.e., $10 million - $7.5 million = $2.5 million for Coverage A).
Coverages A, B, and C are combined the Coverage A amount plus 10% of the Property'sProperty'sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). insurable value for Coverage B plus 10% of the Property'sProperty'sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). insurable value for Coverage C (i.e., $2.5 million + $1 million + $1 million = $4.5 million).
Coverages B and C are combined 10% of the Property'sProperty'sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). insurable value for Coverage B plus 10% of the Property'sProperty'sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). insurable value for Coverage C (i.e., $1 million + $1 million = $2 million).

If law and ordinance insurance is required, the Increased Period of Restoration endorsement (Coverage D) is required.  Coverage D for law and ordinance insurance:

  • extends the business:
    • income and extra expense coverage; and
    • additional time to restore operations when delayed due to enforcement of building or zoning laws; and
  • is paid from the Property’sProperty’sMultifamily residential real estate securing the Mortgage Loan, including the fee simple or Leasehold interest, Improvements, and personal property (per the Uniform Commercial Code). business income/rent loss coverage.

Without this Increased Period of Restoration endorsement, business income coverage does not include any “increased period” that may be necessary due to enforcement of an ordinance or law. 

When evaluating this coverage you should ensure the business income/rent loss limit is adequate to reflect the increased period of restoration.