Yes. There is some risk that the community may prohibit reconstruction if more than 50% is destroyed.
Legal non-conforming means there is a legal violation of the current zoning ordinance because the use of the land (or structures) existed before the ordinance was passed. This is commonly referred to as a “grandfather” clause. It is important to note that as a legal non-conforming use, there is some risk that if more than 50% of the improvements are destroyed due to some cause, such as fire, explosion, natural gas, etc., the community may prohibit the reconstruction of the improvements. Given this possibility, it is important to review the insurance coverage applicable to the property that is used as security for a loan. Some insurance policies will not compensate the insured for the loss in value if the building is not replaced. Other insurance policies do provide replacement cost coverage on buildings; however, if the building is not able to be reconstructed, the policy holder(s) would be paid the Actual Cash Value amount.
AccuVal recommends that property owners and mortgagors be aware of the terms of the applicable insurance coverage. As part of its terms and conditions for making the loan, the mortgagor should be named as the beneficiary of any insurance settlements up to the amount of the outstanding loan in the event the building cannot be reconstructed due to current zoning regulations.