If your building is zoned legal non-conforming, we may require Ordinance and Law coverage — a combination of Coverage A, B and C — on the property policy, and whether we require it is our determination on your file. That one line in our insurance requirements is the entire program rule. Everything else on this page is either the rest of the insurance file that rule sits inside, or general background on how those three coverage parts work, which is labelled as background rather than as our requirement.
That split matters. Most of what is written about Ordinance and Law coverage comes from carriers and agencies and describes policy forms, not lender requirements. It is easy to read that material, then read a lender condition, and assume the lender is enforcing the carrier's version. We are not. We have a short requirement and your carrier has a policy form, and the two have to be reconciled by your insurance agent before closing.
What the program actually requires
Here is the rule, in full, as it appears in our insurance requirements.
Read the hedging carefully, because it is doing real work.
"May be required." This is not automatic. It is a determination we make. A legal non-conforming zoning classification opens the question; it does not by itself answer it.
"A combination of Coverage A, B, and C." The requirement is stated as a combination, not as all three in every case. Which parts we call for, and in what amounts, is part of the same determination.
"Only applicable if the property is zoned legal non-conforming." If the property is zoned legal — conforming — this line does not apply to your file at all. It is not a general commercial insurance requirement that we apply to every loan.
"On all Commercial Properties." The line is not limited to one property type or tier. A legal non-conforming multi-family building and a legal non-conforming warehouse are treated the same way.
What the guidelines do not say matters just as much, and we would rather state the silence than fill it. They do not define Coverage A, B or C. They do not set a dollar amount or a percentage for any of the three. They do not list when we will require all three rather than some. They do not name an endorsement form. They do not address cost. Those are file-level determinations made against your appraisal and your agent's quote.
How "legal non-conforming" gets established on your file
Zoning status is not something you tell us. It comes in through the appraisal, and it is a stated requirement of the appraisal report.
Three things follow from that paragraph.
First, the appraiser has to state the compliance status explicitly. Not imply it, not leave it blank, not write "assumed conforming." If the report does not state and define the zoning classification, describe the permitted uses, and note compliance status, the report is incomplete and the file stalls until it is corrected. Appraisal revisions take days you did not budget for.
Second, legal non-conforming is an acceptable status, not a decline. Borrowers sometimes read a non-conforming finding as a rejection and stop working the file. Illegal use is the disqualifier. Legal non-conforming is acceptable — and it is the status that opens the Ordinance and Law question.
Third, a property subject to a zoning change is out. That is separate from non-conformity: a building that is legal non-conforming and stable is one thing, a property in the middle of a rezoning is another.
Separately, our property use rule requires the property to comply with all municipal, state, and federal zoning and use ordinances required for its legal use, occupancy, and operation. Legal non-conforming status is a form of compliance — the use was lawful when established and the municipality recognizes it — but whether your specific property holds that status, and on what terms, is a question for your municipality and your attorney, not for us and not for your appraiser's shorthand.
General background: what Coverage A, B and C do
Everything in this section is general property-insurance background, not a statement of our program requirements. Our guidelines name Coverage A, B and C without defining them. The descriptions below are how these coverage parts are conventionally structured in the commercial property market. Policy language varies by carrier, by form, and by state. Nothing here should be treated as a description of your policy. Your insurance agent, reading your actual policy and endorsement, is the only person who can tell you what your coverage parts say and what they will pay.
The problem the three parts exist to solve is specific. A standard property policy is built to put the building back the way it was. When current code will not permit that, "the way it was" is no longer a legal outcome, and a policy that pays only for that outcome leaves the owner short. Ordinance and Law coverage is the industry's answer to the gap between what was destroyed and what the law now allows to be built.
Coverage A — value of the undamaged portion
Conventionally, Coverage A addresses the value of the undamaged part of the building. The scenario: a partial loss damages part of a legal non-conforming structure, and the municipality's ordinance requires the remainder to come down rather than be repaired, because past a certain damage threshold the non-conforming status is lost. The base policy pays for the damaged portion. Coverage A is aimed at the standing portion the owner is now compelled to tear down.
Coverage B — demolition cost
Coverage B conventionally addresses the cost of the demolition itself, including debris removal for the undamaged portion. This is a separate line item from the value of what is demolished. Tearing down a standing structure is a real construction cost, and it is not the same money as the value of the structure.
Coverage C — increased cost of construction
Coverage C conventionally addresses the increased cost of rebuilding to current code. If the building went up under a code since superseded — different setbacks, fire suppression, accessibility, energy or seismic standards — the replacement costs more than replicating the original would. Coverage C is aimed at that delta.
The three parts stack against different pieces of the same event, which is why our rule refers to a combination of them rather than to a single coverage.
An illustration of the gap
The figures below are invented for illustration. They are not our numbers, not a quote, and not drawn from any guideline. They exist only to show the shape of the problem.
Assume a 1962 retail building, legal non-conforming, insured for 100% of insurable value at $900,000. A fire destroys 70% of it. The municipality's ordinance says a non-conforming structure damaged beyond 50% may not be restored; the remainder must come down and anything new must meet current code, including a setback that shrinks the buildable footprint and a sprinkler requirement the original building never had.
| Cost after the loss | Who pays it |
|---|---|
| Rebuild value of the 70% that burned | Base property coverage |
| Value of the 30% still standing, now required to be demolished | Coverage A, if in force |
| Cost of demolishing and clearing that 30% | Coverage B, if in force |
| Sprinklers, setback redesign, current-code systems not in the original | Coverage C, if in force |
Without Ordinance and Law coverage in force, the three lower rows are the owner's money. The loan does not shrink because the ordinance changed. That is the exposure the requirement exists to close, and it is why we care: a borrower absorbing an unbudgeted reconstruction shortfall is a borrower whose ability to service the loan has changed.
How Ordinance and Law sits inside the rest of the insurance file
The Ordinance and Law line is one item on a longer list of certificate requirements. If you are assembling insurance for a legal non-conforming property, these are the surrounding requirements it has to coexist with — all of them grounded in the same section of the guidelines.
| Requirement | What the guidelines state |
|---|---|
| Building/hazard form | Fire, lightning, and extended coverage with a "special form" coverage endorsement |
| Coverage amount | 100% of the insurable value of the improvements (from the appraisal report or as determined by the insurance agent/underwriter), or the unpaid principal balance of the mortgage on an agreed value basis |
| Coverage type on certificate | Special Form or All Risk |
| Claims paid basis | Replacement cost basis required — actual cash value is not acceptable |
| Coinsurance | A clause at 80% or greater is allowed, or an Agreed Amount endorsement in place of a coinsurance clause |
| Deductible | Must be specified, and cannot exceed 10% of the insured value of the building for all perils |
| Certificate forms | ACORD 28 for the property policy, ACORD 25 for all liability lines |
| Named insured | Must be the Borrower |
| Policy term | 12-month term per property location |
| Blanket policies | May be allowed |
| General liability | Commercial — $1MM per occurrence and $2MM aggregate per location |
| Cancellation clause | Evidence from policy or endorsement: 30 days for notice of cancellation, 10 days for non-payment |
| Carrier rating | "B+" or better per A.M. Best property and casualty ratings; Lloyd's of London policies are acceptable although they carry no Best rating |
| Premium | Invoice showing premium paid in full; all balances paid prior to or at closing. Quotes acceptable if a payment receipt is provided or payment is collected on the final closing statement. No financing or installments allowed |
Two of those interact with the Ordinance and Law question in ways worth pointing out.
Replacement cost basis. We require claims to be paid on a replacement cost basis and will not accept actual cash value. That requirement and Ordinance and Law coverage are solving adjacent problems — replacement cost addresses depreciation, Ordinance and Law addresses legal buildability — and satisfying one does not satisfy the other. An agent who tells you the replacement cost endorsement already covers code upgrades is making a claim about your specific policy form that you should ask them to point to in writing.
The coverage amount. Our coverage amount requirement is stated against the insurable value of the improvements from the appraisal report, or the unpaid principal balance on an agreed value basis. The guidelines do not say whether Ordinance and Law limits count toward that amount or sit above it. They are silent, and we will not invent an answer. Ask us on your file.
Zoning findings that change loan terms, not just the policy
Ordinance and Law coverage is the insurance consequence of a non-conforming finding. There are separate loan-side consequences that live in the eligibility rules, and borrowers often meet them for the first time at the same moment.
A property with a commercial use located within a residential zoning district, operating under a special use permit or as defined by the municipality, is eligible for a maximum LTV of 50%. All other restrictions still apply. Separately, a property that meets our MSA requirements but is deemed rural by the appraiser is subject to a maximum LTV of 60%.
Those are maximum LTVs, not target LTVs. They are cited here because they are the two zoning-and-location findings in our program that visibly move loan sizing. A special use permit in a residential district is a different fact pattern from legal non-conforming commercial zoning; the two can coexist, and the guidelines do not merge them.
Two more eligibility lines are worth knowing before you spend money on an appraisal for an older building:
- Properties with major building code violations, and properties that have been condemned, are prohibited. So are properties with health and safety problems that may endanger occupants.
- Illegal or unpermitted units are not included as revenue or in value, and the file cannot proceed unless the illegal portion of the structure is removed or permitted.
That last one is where a legal non-conforming building most often runs into trouble. Non-conforming and unpermitted are different findings with different outcomes: the first is acceptable and triggers an insurance question, the second stops the file until it is cured.
What to do with this before you apply
Three concrete moves, in order.
Determine the zoning status before the appraisal, not after. Your municipality's zoning or planning department can tell you the classification and whether the property is recognized as legal non-conforming. That call costs nothing and changes what you should be preparing.
Send your insurance agent the question in writing. Not "do I have Ordinance and Law coverage" but "the building is zoned legal non-conforming; quote Ordinance and Law Coverage A, B and C, state each part's limit, and tell me what it adds to the premium." Agents answer written questions in writing, and you want that answer in the file.
Bring both answers to us at application. With the zoning status and a quote in hand, our determination is a short conversation instead of a late-stage condition, and the premium lands in your closing figures where it belongs.
What this page does not do
This page explains one requirement in our insurance section and the eligibility rules around it. It is not an approval, not a quote, not a rate, and not a commitment to lend.
It does not tell you whether your property is legal non-conforming. That is determined by your municipality and stated in the appraisal report.
It does not interpret your local zoning ordinance — including the damage threshold at which non-conforming rights are lost, how it is measured, or any right to rebuild. Those are questions of local law for your municipality and your attorney.
It does not describe your insurance policy. Ordinance and Law forms, limits, exclusions and definitions vary by carrier, by form and by state. Coverage A, B and C are described here as they are conventionally structured in the market, not as they appear in any policy you hold. Only your insurance agent, reading your policy, can tell you what you have.
It does not tell you what Ordinance and Law coverage will cost, what limits we will require, whether we will require all three parts, or whether those limits count toward the 100%-of-insurable-value requirement. Our guidelines are silent on every one of those points. Rather than supply a plausible number, we will answer them on your file.
It does not address tax treatment of insurance proceeds, financing a rebuild, or claims handling after a loss, and it does not cover our 1-4 unit investor program, which is written under separate guidelines.
Guideline SBC 08/03/2026 · Reviewed August 31, 2026
Published August 31, 2026 · Updated August 31, 2026
How to use this guide
This article is educational guidance, not an offer or commitment to lend. Rules, property facts, credit, leverage, documentation, and full underwriting still control any actual scenario.