Insurance and ordinance or law issuesArticle added by Diane Richardson on March 4, 2009
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Diane Richardson

Union, KY

Joined: October 06, 2008

My Company

FC&S Online

Various types of political jurisdictions often adopt and then enforce ordinances or laws that regulate the construction, operation, and occupancy of different types of buildings. These ordinances and laws fall within the broad category usually referred to as building codes. Many building-related ordinances and laws are based on uniform codes and standards promulgated by the National Fire Protection Association (NFPA) or the International Code Council (ICC). Ordinances and laws may differ depending upon the type or occupancy of structures. For example, states may adopt and enforce separate residential and commercial building codes. Likewise, the building codes that govern public buildings may differ from those for private buildings. Healthcare facilities, including hospitals and assisted living homes, may need to conform to even more stringent codes. This article provides an overview of various types of ordinances and laws that affect building construction and repair. It then reviews how various insurance policies treat the additional costs of conforming to building codes when settling a claim that arises from a covered cause of loss. In conclusion, we discuss various courts' take on the exclusion for coverage related to ordinance or law.

Overview of building codes

Professional organizations that specialize in safety develop best practices, which then are promulgated as written standards that may be adopted by political jurisdictions such as municipal, state, and federal governments. These ordinances and laws then become mandatory requirements that then are enforced by the applicable jurisdictions.

Building codes may address areas such as fire suppression by requiring that certain types of buildings have installed and operational fire suppression systems that can detect a fire, set off an alarm, and then suppress or control it. Other areas that frequently are a part of building codes are the installation and use of fire doors, stairwell construction and protection, electrical standards, elevator requirements, and the like.

For example, the National Fire Protection Association (NFPA) publishes hundreds of codes and standards, many of which are adopted by various jurisdictions as a basis for building codes. The NFPA Web site and catalog, www.nfpa.org, lists codes and subject areas such as the Life Safety Code©, Uniform Fire Code(TM), NFPA 5000® Building Construction and Safety Code®, hazardous materials codes, electrical safety codes, and standards for various types of fire suppression equipment such as portable fire extinguishers and fire suppression systems.

The International Code Council (ICC) publishes the International Fire Code (IFC). According to Donald L. Schmidt, ARM, CEO of Preparedness, LLC, both the NFPA Uniform Fire Code and the IFC are adopted in individual states across the country.

The NFPA has developed numerous documents that address specific technical subjects such as fire suppression systems and fire hazards, among others. Many of these documents are mandatory references within both the ICC's fire code and NFPA's Uniform Fire Code. Businesses within jurisdictions that have adopted the IFC may also comply with the requirements of many NFPA documents that have been incorporated as mandatory references with the IFC.

The code adoption process varies from state to state and municipality to municipality. Some major cities adopt their own codes -- mostly by writing amendments to model codes to meet local needs. For example, following Hurricane Andrew's August 24, 1992 devastation in Florida, local building codes were revised. The new code required, among other items, metal bracing to anchor roofs to walls, more reinforcement of roof trusses, and, in high wind zones, exterior windows that were made of impact glass, protected with storm shutters, or engineered to withstand internal pressure. The code adoption process requires enabling legislation that may mandate retroactive compliance for all facilities after a specified number of days past legal adoption. Other states allow "grandfathering" of existing facilities. Grandfathering is often permitted by making new building codes apply only to new construction, renovations, and additions. Grandfathering is not as commonly seen with fire codes.

Frequently, legislation is passed to adopt a new code or standard or a newer edition of a code or standard. The legislation will address applicability (i.e., all facilities, only new facilities, etc.,) the timeframe for compliance, and procedures for hearing appeals and granting waivers. The code or standard prescribes the technical requirements. However, the process can often take a long time. Florida's code, although revised on a regular basis, finally included in the 2002 revision the recommendations arising out of Andrew.

On many code issues, the "authority having jurisdiction" (such as the fire marshal, building inspector, or other governmental representative) typically has the authority to do what is necessary to protect the public. Codes and standards frequently are revised and updated, many as frequently as every three years.

Building codes reflect local concerns. For example, the suggested Ohio 2007 revisions include reference to such items as aisle access way width when tables and seating are involved, and egress balconies. (As an aside, Ohio's draft plumbing code revision says: "Words stated in the present tense include the future; words stated in the masculine gender include the feminine and neuter; the singular number includes the plural and the plural the singular" [§ 201.2]. Should policies of insurance take a hint?) But in California, the proposed building standards for healthcare facilities include, as might be expected, reference to earthquake anchorage, bracing, and installation of structural elements in new construction, and retrofitting existing structures in order to manage the earthquake exposure.

As safety professionals learn more about specific hazards, codes are revised, often with interim amendments added. The Beverly Hills Supper Club fire in Kentucky, 1977, in which 165 persons died, was linked to use of aluminum wiring installed in 1970 and 1971. Following the fire, it was learned that, without proper receptacles, heat from the wiring could ignite nearby materials. Fire traveled up between walls until the building was engulfed. The building code was soon revised to prohibit the use of aluminum wiring. After the February 21, 2003 well-chronicled fire at The Station nightclub in Rhode Island, NFPA's technical committee on life safety adopted an interim requirement for automatic sprinklers in nightclubs of a certain minimum size or larger. That fire also precipitated a move in Rhode Island to stop grandfathering compliance with the latest fire code, a practice that had been in place for nearly fifty years. Of course, in the Rhode Island fire, human negligence in setting off fireworks near flammable soundproofing foam was the cause of the fire, rather than, as in the Beverly Hills fire, a standard building product. Nonetheless, fire codes can and do attempt to account for human shortsightedness as well as building practices.

One last note: in this article, the local building ordinances and their effects on insurance that we discuss do not include floodplain or coastal elevation requirements. These requirements are directly related to flood insurance. In the dwelling form, for example, coverage D is for increased cost of compliance and provides up to $20,000. But coverage is limited to the increased costs necessary to comply with a state or local floodplain management law which affects repair or reconstruction -- elevation, flood-proofing, relocation, or demolition -- of a flood-damaged building. The coverage is not intended to respond to any loss other than one caused by flood.

Commercial property exclusions

Couch on Insurance Third Edition, in § 152:22, which discusses exclusions in general, notes that "[u]nlike losses caused by violence or warlike activity as discussed previously in this chapter, some losses occur because of the actions of a civil authority functioning in its ordinary governing capacity. Because this kind of loss is unpredictable, it is typically excluded from most property insurance policies. Many such provisions excluded liability for the insurer for loss or damage caused directly or indirectly by enforcement of any ordinance or law regulating construction, repair or right to use property or requiring the destruction or tearing down of any property... An insured may seek coverage for some of the excluded losses by paying additional premium." Indeed, it is the unpredictability of building codes and their resulting enforcement that creates a problem for insurers as well as their insureds. Rate-making must rely on being able to predict a certain number of losses. But when the type of loss changes because the building codes change, rate-making becomes an art rather than a science. Using the Beverly Hills Supper Club fire as an example, the building incorporated what was then thought of as "state of the art" aluminum wiring. Only after the disaster occurred was the wiring found to be dangerous.

All three ISO causes of loss forms CP 10 10 04 02, CP 10 20 04 02, and CP 10 30 04 02 exclude coverage for any additional costs to repair or replace a building that are necessary because of an ordinance or law that regulates the construction, repair, or use of a building. They also exclude coverage for the additional costs that may arise because property must be demolished due to an ordinance or law that requires it. Each form contains the following exclusion:

1. We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.
    a. Ordinance or Law
    The enforcement of any ordinance or law:
      (1) Regulating the construction, use or repair of any property; or
      (2) Requiring the tearing down of any property, including the cost of removing its debris.
    This exclusion, Ordinance or Law, applies whether the loss results from:
      (1) An ordinance or law that is enforced even if the property has not been damaged; or
      (2) The increased costs incurred to comply with an ordinance or law in the course of construction, repair, renovation, remodeling or demolition of property, or removal of its debris, following a physical loss to that property.
Since the exclusion is prefaced by anti-concurrent causation language, it applies even when a covered cause of loss, such as fire or windstorm, precipitates the cost of having to comply with a building code upgrade. (Additional information on this doctrine and how coverage is affected by policy wording that deals with it may be found at Concurrent Causation and Efficient Proximate Cause, Fire and Marine volume, Miscellaneous Property section).

The exclusion works to eliminate coverage for loss governed by ordinance or law following an otherwise covered loss. So, for example, if a hurricane hits a building, the windstorm damage would be covered, provided, of course, no windstorm exclusion applies. But, before the building can be repaired, it is determined that the entire building must be demolished because over 50 percent of it is damaged. The cost to demolish the undamaged part of the building, and the value of that undamaged part that now must be replaced, would not be paid for by the insurance policy. Returning again to Hurricane Andrew, many insureds in the years following learned to their horror that, although because of grandfathering their damaged homes had not needed to be retrofitted with hurricane resistant upgrades during the repair process, damage greater than 50 percent from storms following Andrew meant that their homes had to be demolished. Accordingly, insurance declined to pay the increased costs.

Likewise, additional costs might be incurred if, for example, disabled access ramps had to be added to a building, which prior to the loss only had stairs. The costs of the ramps, which are now required by an ordinance or law, would fall outside the coverage of the policy. Or, take the case of a building that is gutted by fire. If the building had wooden doors prior to the loss, the insurance company is obligated to pay the amount necessary to replace those doors with wooden doors of like kind and quality to those that existed prior to the fire, regardless of whether the local municipality or state required at the time of loss that steel fire doors be used. The insurance company is not responsible for paying the cost to upgrade from wooden doors to steel fire doors; that additional cost must be borne by the insured.

The ISO building and personal property form, CP 00 10 04 02, excludes coverage for the increased cost of enforcing any ordinance or law regulating the construction, use, or repair of properties that have been damaged by a covered cause of loss. Such exclusionary wording exists in three different sections of the form: loss payment, valuation, and replacement cost optional coverage as follows:
    4. Loss Payment
      b. The cost to repair, rebuild or replace does not include the increased cost attributable to enforcement of any ordinance or law regulating the construction, use or repair of any property.
    7. Valuation
      If the Limit of Insurance for Building satisfies the Additional Condition, Coinsurance, and the cost to repair or replace the damaged building property is $2,500 or less, we will pay the cost of building repairs or replacement. The cost of building repairs or replacement does not include the increased cost attributable to enforcement of any ordinance or law regulating the construction, use or repair of any property.
    G. Optional Coverages
      3. Replacement Cost
        f. The cost of repair or replacement does not include the increased cost attributable to enforcement of any ordinance or law regulating the construction, use or repair of any property.

    While the repetition of this language may seem redundant, it is included in these clauses in order to preclude argument that the additional costs should be paid because they are simply the result of repairing damaged property that the insurer has agreed to repair or replace. The policy thus clarifies that this is coverage that is not intended to be provided.

    Commercial property coverage

    After clearly excluding such additional costs in three sections of the form, the commercial property form adds back a limited amount of coverage for such increased costs of construction arising from building codes under section 4. Additional Coverages. This section of the building and personal property form states:
      e. Increased Cost of Construction
        (1) This Additional Coverage applies only to buildings to which the Replacement Cost Optional Coverage applies.
        (2) In the event of damage by a Covered Cause of Loss to a building that is Covered Property, we will pay the increased costs incurred to comply with enforcement of an ordinance or law in the course of repair, rebuilding or replacement of damaged parts of that property, subject to the limitations stated in e.(3) through e.(9) of this Additional Coverage.
        (3) The ordinance of law referred to in e.(2) of this Additional Coverage is an ordinance or law that regulates the construction or repair of buildings or establishes zoning or land use requirements at the described premises, and is in force at the time of loss.
        (4) Under this Additional Coverage, we will not pay any costs due to an ordinance or law that:
          (a) You were required to comply with before the loss, even when the building was undamaged; and (b) You failed to comply with.
        (5) Under this Additional Coverage, we will not pay for:
          (a) The enforcement of any ordinance or law which requires demolition, repair, replacement, reconstruction, remodeling or remediation of property due to contamination by "pollutants" or due to the presence, growth, proliferation, spread or any activity of "fungus", wet or dry rot or bacteria; or
          (b) Any costs associated with the enforcement of an ordinance or law which requires any insured or others to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of "pollutants", "fungus", wet or dry rot or bacteria.
        (6) The most we will pay under this Additional Coverage, for each described building insured under this Coverage Form, is $10,000 or 5 percent of the Limit of Insurance applicable to that building, whichever is less. If a damaged building is covered under a blanket Limit of Insurance which applies to more than one building or item of property, then the most we will pay under this Additional Coverage, for that damaged building, is the lesser of: $10,000 or 5 percent times the value of the damaged building as of the time of loss times the applicable coinsurance percentage. The amount payable under this Additional Coverage is additional insurance.
        (7) With respect to this Additional Coverage:
          (a) We will not pay for the Increased Cost of Construction:
            (i) Until the property is actually repaired or replaced, at the same or another premises; and
            (ii) Unless the repairs or replacement are made as soon as reasonably possible after the loss or damage, not to exceed two years. We may extend this period in writing during the two years.
          (b) If the building is repaired or replaced at the same premises, or if you elect to rebuild at another premises, the most we will pay for the Increased Cost of Construction, subject to the provisions of e.(6) of this Additional Coverage, is the increased cost of construction at the same premises.
          (c) If the ordinance or law requires relocation to another premises, the most we will pay for the increased Cost of Construction, subject to the provisions of e.(6) of this Additional Coverage, is the increased cost of construction at the new premises.
        (8) This Additional Coverage is not subject to the terms of the Ordinance or Law Exclusion, to the extent that such Exclusion would conflict with the provisions of this Additional Coverage.
        (9) The costs addressed in the Loss Payment and Valuation Conditions, and the Replacement Cost Optional Coverage, in this Coverage Form, do not include the increased cost attributable to enforcement of an ordinance or law. The amount payable under this Additional Coverage, as stated in e.(6) of this Additional Coverage, is not subject to such limitation.
There are several limitations to the commercial policy coverage.

First, it applies only when the insured selects replacement cost coverage.

Second, it is limited to the lesser of $10,000 or 5 percent of the limit of insurance applicable to the building, or, in the case of blanket coverage, the lesser of $10,000 or 5 percent times the value of the damaged building at the time of loss times any applicable coinsurance percentage. Needless to say, with most commercial buildings of any size, the insured will be limited to $10,000 to cover any ordinance or law requirements unless additional coverage is purchased.

Third, the coverage will not respond to any ordinance or law that was in place prior to the loss, and that the insured was required to implement. Going back to California, say that following the Northridge Earthquake of 1994 all commercial buildings open to the public were required to add clearly marked exit strip lights in the floors of all enclosed hallways. San Francisco's Ghirardelli Square building owners, however, decided the expense was too great and the "down time" too long, so they decided not to comply. Should a covered loss now occur, the policy would not pay for the cost to go back and install the lighting the owners should have installed previously.

Fourth, the coverage will not respond to any ordinance or law involving testing for, or remediation of, pollutants or fungus. And, should the insured decide to replace the lost or damaged building at another premises, the coverage applies only to the costs that would have been incurred if the insured rebuilt at the premises where the loss occurred.

Fifth, the insurer will not pay the additional amount until the property is actually repaired or replaced, at the same or another premises, nor will the insurer pay unless repairs or replacement is completed within two years, unless the insurer agrees to extend the period. The agreement to extend must be in writing; a verbal "OK" is not sufficient.

And, finally, the insurer will pay no more than the increased cost of construction at the same premises, even if the insured elects to rebuild at a different premises. If, however, the insured is required by law to rebuild elsewhere, then the increased cost of construction at the new premises is subject to the 5 percent or $10,000 amount given in e.(6).

Businessowners treatments

The exclusion of coverage in the businessowners form BP 00 03 01 06 is the same as in the commercial property form CP 00 10. Likewise, except for a slight variation in wording (the BP 00 03 states "This Additional Coverage applies only to buildings insured on a replacement cost basis"), the additional coverage for increased cost of construction is identical to that on the commercial property form. The businessowners form is written on a replacement cost basis unless the insured selects actual cash value; in the commercial property form actual cash value applies unless optional replacement cost coverage is elected. In the businessowners form, then, provided the building is insured on a replacement cost basis, the insured will receive up to $10,000 coverage for the increased cost of construction because of enforcement of any ordinance or law regulating repair, rebuilding, or replacement. Unlike the commercial property form, the businessowners form does not give "the lesser of" $10,000 or 5 percent of the limit of insurance; $10,000 is the amount of this additional coverage.

As in the commercial property form, the ordinance or law must be in force at the time of the loss. Had the insured been required to comply with any ordinance or law prior to a loss, but failed to do so, the coverage will not pay to remedy that failure.

The businessowners form, like the commercial property form, will not pay costs for demolition, repair, replacement, reconstruction, remodeling or remediation of property due to pollutants or fungi, even if required by ordinance or law.

The businessowners form has the same requirements as the commercial property form for rebuilding or repairing; rebuilding or repairing must be completed before the insurer will pay the increased costs; repairs or replacement must be accomplished within two years following the loss, unless the time is extended by the insurer in writing. And, as in the commercial property form, if the insured elects to rebuild at another premises, the total he or she can collect is what the increased costs would have been at the premises where the loss occurred. However, if the insured is forced to relocate because of an ordinance or law, then the full amount of coverage is available.

Homeowners exclusions

The ISO 1991 homeowners policies excluded coverage for loss resulting from enforcement of any ordinance or law "regulating the construction, repair, or demolition of a building or other structure" unless the coverage was purchased by endorsement. Like the current exclusion, the 1991 exclusion was prefaced by anti-concurrent causation language. ISO began, in 1994, to file an amendatory endorsement to the 1991 form, which provided some coverage. This coverage grant (discussed later) in the amendatory endorsement was then incorporated into the 2000 homeowners edition. The exclusion, however, remains. Although it might appear unnecessary to continue the exclusion in the form, since there is a certain amount of coverage given, the point is to make it clear that the only coverage available is that in the additional coverages -- unless, of course, the insured purchases an additional amount of coverage by means of endorsement.

The current (2000) ISO homeowners HO 00 03 form contains the following exclusion. Note the similarity to the commercial property exclusion in that the exclusion is prefaced by anti-concurrent causation language.
    A. We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss. These exclusions apply whether or not the loss event results in widespread damage or affects a substantial area.
      1. Ordinance Or Law
        Ordinance Or Law means any ordinance or law:
        a. Requiring or regulating the construction, demolition, remodeling, renovation or repair of property, including removal of any resulting debris. This Exclusion A.1.a.does not apply to the amount of coverage that may be provided for in E.11. Ordinance Or Law under Section I -- Property Coverages;
        b. The requirements of which result in a loss in value to property; or
        c. Requiring any "insured" or others to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of Pollutants.
        Pollutants means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.
    This Exclusion A.1. applies whether or not the property has been physically damaged.

The exclusion states that the type of ordinance or law that is the subject of the exclusion is the kind that regulates construction, demolition, remodeling, renovation, or repair of property, including removal of any debris. The exclusion goes on to state that it does not apply to the amount of coverage given in the additional coverages (E.11.).

The exclusion further eliminates coverage for any loss in value to property that is the result of an ordinance or law. This might seem a strange exclusion, but the exclusion applies whether or not the property has been physically damaged. So, for example, a new zoning ordinance might be passed. The insured's home might have been in a residential zone; following the change the home is now zoned "mixed," with the result that a sale will not bring the pre-change purchase price. The insured cannot then turn to his insurer with a request for the difference.

Finally, there is no coverage for any testing, clean up, monitoring, treating, detoxifying, or neutralizing of any pollutants. "Pollutants" is defined here, as it is elsewhere in the policy, as "any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste." There is authority to support the assertion that all of these items are man-made, and thus of the type that are environmentally polluting (as described in CERCLA, the Comprehensive Environmental Response, Compensation, and Liability Act, December 11, 1980). This law created a tax on the chemical and petroleum industries and provided broad Federal authority to respond directly to releases or threatened releases of hazardous substances that may endanger public health or the environment. Thus, a naturally-occurring substance would likely fall outside the exclusion.

Homeowners coverage

As noted, the homeowners forms provide some coverage for loss caused by enforcement of ordinance or law. In the ISO form, it is additional coverage E.11., which states:
    11. Ordinance Or Law
      a. You may use up to 10 percent of the limit of liability that applies to Coverage A for the increased costs you incur due to the enforcement of any ordinance or law which requires or regulates:
        (1) The construction, demolition, remodeling, renovation or repair of that part of a covered building or other structure damaged by a Peril Insured Against;
        (2) The demolition and reconstruction of the undamaged part of a covered building or other structure, when that building or other structure must be totally demolished because of damage by a Peril Insured Against to another part of that covered building or other structure; or
        (3) The remodeling, removal or replacement of the portion of the undamaged part of a covered building or other structure necessary to complete the remodeling, repair or replacement of that part of the covered building or other structure damaged by a Peril Insured Against.
      b. You may use all or part of this ordinance or law coverage to pay for the increased costs you incur to remove debris resulting from the construction, demolition, remodeling, renovation, repair or replacement of property as stated in a. above.
      c. We do not cover:
        (1) The loss in value to any covered building or other structure due to the requirements of any ordinance or law; or
        (2) The costs to comply with any ordinance or law which requires any 'insured' or others to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of, pollutants in or on any covered building or structure.
        Pollutants means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.
      This coverage is additional coverage.

There are understandable similarities between the coverage given in the homeowners forms and in the commercial property forms. Both respond to increased costs resulting from enforcement of an ordinance or law regulating construction or repair following damage by a covered cause of loss.

The homeowners coverage, though, is stricter in some aspects but broader in others. The homeowners coverage does not mention, as does the commercial coverage, that the insured can apply the coverage toward replacement at another premises. The wording of the coverage makes it clear that the coverage applies only when the insured premises, as the result of a covered loss, is undergoing construction, demolition, remodeling, renovation, or repair.

As noted, the coverage is broader than that of the unendorsed commercial form. Unlike the commercial form, the coverage applies to covered buildings or covered other structures. The commercial form limits the coverage to buildings. Additionally, the insured can use the coverage in two ways form CP 00 10 does not include. The first is that, should a covered loss make it necessary to demolish an undamaged portion of a structure because the damaged portion must be demolished, the coverage will respond. For example, in Florida if 50 percent or more of a dwelling is destroyed, the remainder must be demolished. The ordinance or law coverage will respond, provided the damage was caused by a covered cause of loss.

The second coverage available to a homeowners insured is for remodeling, removal or replacement of the portion of the undamaged part of the covered building necessary to complete the remodeling, repair or replacement of the damaged part of the building or other structure.

Questions sometimes arise about the scope of this provision. Does the language mean that, say, if a lower portion of a dwelling is damaged, and the only means of completing a repair is to remove and repair the upper portion, then this is the coverage to respond? Or, if, say, ordinance or law now requires that not only must the plumbing in the damaged part of the dwelling be replaced, but also the plumbing in the undamaged portion? It seems likely that the latter interpretation is correct. Remember, the coverage is entitled "ordinance or law," and it is intended to respond when ordinance or law regulates the rebuilding or replacement process. The first example falls under a repair or replacement practice that is not necessarily governed by any ordinance or law; it is simply the means of carrying out a repair. But, in the second example, the government ordinance or law will not certify the building for occupancy unless the plumbing replacement throughout the dwelling is complete.

Endorsement to cover the exposure

The ISO commercial property endorsement that provides broader ordinance or law coverage than the CP 00 10 is CP 04 05 04 02. This endorsement can also be used with the condominium association coverage form and the standard property policy. Coverage must be indicated in the endorsement's schedule, with a limit of insurance shown for each selection except coverage A.

There are four possible coverages: coverage A, coverage for loss to the undamaged portion of the building; coverage B, demolition cost coverage; coverage C, increased cost of construction; or coverages B and C may be combined for one limit of insurance. These are discussed later in this section.

The endorsement states that coverage is triggered by an ordinance or law which "regulates the demolition, construction or repair of buildings, or establishes zoning or land use requirements at the described premises; and is in force at the time of the loss." Coverage under the endorsement applies only to the minimum requirements of the ordinance or law; it will not apply to any suggested or recommended repairs or rebuilding that exceeds the ordinance's actual requirements. For example, an ordinance might require that a room's light switches be placed to the right of the entrance. The insured decides to place them both to the right and the left. The coverage will not extend to any additional cost to place them at the left.

The endorsement provides coverage under two possible scenarios. First, of course, there is coverage if the building sustains direct physical damage that is covered under the policy, and the damage results in enforcement of any law or ordinance. A note of clarification regarding "covered under the policy" is in order. The CP 00 10 with CP 10 30 attached, for example, excludes coverage for earth movement. But if earthquake coverage is purchased, then "the policy" now includes the open perils of the CP 10 30 as well as form CP 10 40 08 99. So, if an insured sustained loss resulting from earthquake, there would be coverage for ordinance or law. The second scenario describes application of coverage if a building is damaged by both a covered and an excluded cause of loss; fire and flood, perhaps. If the entire amount of damage results in enforcement of ordinance or law, then the insurer will not pay the entire amount of ordinance or law coverage; the insurer will pay the proportion that the covered direct physical damage bears to the total direct physical damage. But, if the fire damage alone would have resulted in enforcement of an ordinance or law, then the entire amount would be payable.

There is another possible scenario resulting in no coverage. That could occur if the building sustains excluded direct physical damage and covered direct physical damage, but only the excluded damage is the subject of an ordinance or law. In that case, the coverage will not respond even if there is covered direct physical damage. The point the endorsement is making is that there must have been damage that might result in loss because of ordinance or law in order to trigger the endorsement. Say, for example, that a building sustains both flood and fire damage. Local floodplain ordinance now mandates elevated construction, but there are no code upgrades necessary because of the fire damage. The insured cannot turn to his or her policy for coverage for the elevation, even though the building also sustained damage from a covered cause of loss.

There is no coverage for enforcement of any ordinance or law requiring demolition, repair, replacement, reconstruction, remodeling, or remediation of property because of contamination by pollutants (as defined in the policy) or because of the presence of fungus (as defined in the policy).

The first of the coverages, coverage A, is for loss to an undamaged portion of a building. (Remember, each desired coverage must be indicated.) Here, the damage to a building must be such that the undamaged portion must be demolished. Say, for example, that a fire damages the bottom six stories of a ten story building to the extent that the remaining four stories must now be demolished. Coverage A responds. The coverage, however, is included within the limit of insurance and does not increase the limit. Although this might appear to make the coverage limited in scope, remember that the insurer's only responsibility, without coverage A, is to repair or replace the damaged building. But if ordinance or law requires demolition because over 50 percent is damaged, this coverage will respond. The endorsement refers to the coverage as "loss of value" of the undamaged portion since it must now be demolished.

If coverage A is invoked, there are two possibilities for loss settlement. If the insured has chosen replacement cost coverage, and the property is being repaired or replaced on the same or another premises, the insurer pays the lesser of: (a) the amount the insured would actually spend to repair, rebuild or reconstruct, but not more than it would cost to restore the building to the same height, floor area, style and comparable quality of the original building; or (b) the limit of insurance applicable to the damaged building. The second possibility applies if the insured has chosen replacement cost coverage but elects not to repair or replace the building, or if the insured has not chosen replacement cost coverage. In this event, the insurer will not pay more than the lesser of the actual cash value of the building at the time of the loss, or the limit of insurance applicable to the damaged building.

If the insured has chosen coverage B, demolition cost coverage, the insurer pays the cost to demolish and clear the site of undamaged parts of the same building because of enforcement of any ordinance or law requiring demolition of the undamaged portions of the building. The coinsurance additional condition does not apply to this coverage. If the insured has chosen this coverage, the insurer pays not more than the lesser of the amount the insured actually spends to demolish and clear the site, or the applicable limit of insurance shown for coverage B.

Coverage C (which, remember, may be combined with coverage B) is increased cost of construction coverage. When this coverage is selected, the insurer will pay for: (a) the increased cost to repair or reconstruct damaged portions of a covered building that has sustained loss from a covered cause of loss; or (b) the cost to reconstruct or remodel undamaged portions of that building, whether or not demolition is required; or (c) both (a) and (b). The coverage applies only if the insured intends the restored building for similar occupancy as it had prior to the loss, unless the occupancy would be prohibited by ordinance or law. For example, the insured owner of a meat-packing plant cannot use the money to restore the building to an office building, unless ordinance or law now forbids a meat-packing plant. If the building is not repaired, restored, or remodeled, then the insurer makes no payment.

An important part of this coverage is that it will apply, if required by ordinance or law, to certain items of "property not covered." These are: the cost of excavations, grading, backfilling and filling; foundation of the building; pilings; and underground pipes, flues and drains. These items are then deleted from the Property Not Covered section in CP 00 10, but only with respect to this coverage. So, for example, if an ordinance now requires that pilings for the new building must be sunk two feet further into the ground than those of the damaged building, the cost for compliance falls under this coverage.

No payment is made by the insurer until the property is actually repaired or replaced at the same or a different premises. Repairs or replacement must be made as soon as reasonably possible, not to exceed two years after the loss, unless the time is extended in writing by the insurer. If the building is repaired or replaced at the same premises, or if the insured decides to rebuild at another premises, the most the insurer will pay is the lesser of the increased cost of construction at the same premises, or the limit of insurance for coverage C. If ordinance or law requires relocation, the most paid is the lesser of the increased cost of construction at the new premises, or the limit of insurance for coverage C.

As noted earlier, it is possible to choose a combined limit of insurance for both coverage B demolition cost and coverage C increased cost of construction. If this is the case, the insurer will not pay more for demolition costs than the amount actually spent to demolish and clear the site. The insurer will not pay for any increased costs of construction until the repair or replacement is complete at the same or another premises. As with coverage C, the insurer requires repair or replacement to be made as soon as reasonably possible after the loss, not to exceed two years unless this time is extended in writing. If the insured repairs or replaces at the same premises, or elects to rebuild at another premises, the most paid is the increased cost of construction at the premises where the loss occurred. But if ordinance or law requires relocation, the most paid is the increased cost of construction at the new premises.

As was the case with the unendorsed CP 00 10, the insurer will not pay for any loss because of an ordinance or law the insured was required to comply with prior to the loss, but failed to do so.

Coverage for ordinance or law under the businessowners form BP 04 46 01 06 is similar to that found under CP 04 05, although rather than coverages A, B, and C it refers to coverages 1, 2, and 3. As was the case with CP 04 05, coverage 2 demolition cost coverage and coverage 3 increased cost of construction coverage can be combined with one limit applying to both. Because the same restrictions and limitations apply under endorsement BP 04 46 as under the CP 04 05, they will not be further discussed.

There are some noteworthy differences between the forms, though. Because businessowners coverage does not contain coinsurance conditions (the insured chooses between a replacement cost or an actual cash value settlement), paragraph E.5.d of the BP 00 03 is deleted with regard to demolition cost coverage and increased cost of construction coverage. The businessowners form, unlike the CP 00 10, does not exclude the cost of excavations, grading, backfilling and filling; foundation of the building; pilings; and underground pipes, flues and drains. So, there is no "give-back" of coverage in form BP 04 46. Finally, because the businessowners form includes business income and extra expense, endorsement BP 04 46 allows the insured to elect coverage for an increased suspension of operations because of enforcement of ordinance or law regulating construction, repair, or demolition. The definition of "period of restoration" is amended to include any increased period required to comply with minimum standards of any ordinance or law. This extended period, however, will not apply to any additional time required because any insured is required to monitor, test for, clean up or otherwise remove any pollutants.

As noted earlier, homeowners coverage under the 2000 ISO forms gives 10 percent of the coverage A limit of insurance for ordinance or law. This amount may be increased to a percentage selected by the insured by attaching HO 04 77 10 00. Coverage itself is not amended or altered by the endorsement from that already contained in the homeowners forms themselves.

Court interpretation of policy language

For the most, the courts have upheld language precluding coverage for loss caused by enforcement of any ordinance or law governing repair or rebuilding -- that is, except when they have refused to uphold the language based upon various theories of recovery.

Two cases in California illustrate this. The first is Bischel v. Fire Insurance Exchange, 1 Cal. App.4th 1168 (1991). Here, the insured's boat dock sustained damage when a watercraft hit it. The insurer agreed to pay for the damage, but only to the extent it restored the dock to pre-loss condition. But since the dock's construction, new standards had been enacted that would have required expending a significantly greater amount of money than the insured received. The insured sued. In upholding the exclusionary language, the court explained that in accordance with California Insurance Code section 2071, the statutory standardized form included language requiring the insurer to indemnify an insured for the costs of repair or replacement "without allowance for any increased cost of repair or reconstruction by reason of any ordinance or law regulating construction or repair." Thus the principle of indemnity -- that the insured should be put back in a pre-loss condition, not in a better one -- was upheld, and so the court found for the insurer.

But in the case of Fire Insurance Exchange v. Superior Court, 116 Cal. App. 4th 446 (2004), the exclusion was not upheld. In this case, a substantial number of homeowners sustained earthquake damage from the Northridge Earthquake of 1994. The insurer declined to pay costs to stabilize land, and also the costs for code upgrades now mandated by building code. Suit followed. The trial court found for the insureds; the appellate court overturned the finding on the costs for land stabilization, but upheld the decision on code upgrades. The court looked at the policy exclusion: "We do not insure for loss either consisting of, or caused directly or indirectly by ... Enforcement of any ordinance or law regulating construction, repair or demolition of a building or other structure, unless endorsed to this policy." The court then looked at the Bischel court's reasoning, and section 2071 of the California Code. The court said that the code referred to the insurer's duty to indemnify the insured "to the extent of the actual cash value of the property at the time of loss, but not exceeding the amount which it would cost to repair or replace the property with material of like kind and quality within a reasonable time after the loss, without allowance for any increased cost of repair or reconstruction by reason of any ordinance or law regulating construction or repair." So, if a policy contained this language, the court agreed there would be no coverage. But the pertinent policies provided guaranteed replacement cost coverage "for equivalent construction and use on the same premises." The insurer argued that "equivalent construction" obviously meant pre-loss construction, but the court responded that the phrase was nowhere near the exclusion for ordinance or law, and the guaranteed replacement coverage provision was not followed by words to the effect that the provision did not include increased costs because of any ordinance or law regulating repair or reconstruction. So, the exclusion in this instance was not upheld. The court also noted that the Bischel court appeared to have taken a stand against replacement cost policies as against public policy because they put insureds in better positions than prior to any loss, and held this decision to be an anomaly.

There is a school of thought that holds that the exclusion for enforcement of any ordinance or law regulating construction, repair or demolition of a building should be interpreted as another peril, such as lightning or wind. According to this approach, if a covered peril is the efficient proximate cause of the loss, then that is the peril that triggers coverage despite the exclusion. The exclusion thus becomes simply a statement that loss caused only by the enforcement of ordinance or law will not be covered. This approach is typified by two cases. The first is Bering Strait School District v. RLI Insurance Co., 873 P.2d 1292 (Ak. 1994). A high school building, built in 1979, was destroyed by fire in 1989. Building codes had changed and in order to rebuild the additional cost was over $200,000, which the insurer declined to pay. The policy was written on a replacement cost basis, and contained an exclusion for "loss or increased cost occasioned by any Civil Authority's enforcement of any ordinance or law regulating the reconstruction repair, or demolition of any property..." The court explained that the provision "does not limit [the insurance companies'] obligation for the cost of repair or replacement of the building when a loss has occurred that is covered by the policy, but merely states that if the loss itself is caused by an ordinance or law, there is no coverage." The court also stated that under the "reasonable expectations doctrine, replacement cost coverage afforded under all risk insurance policies for high school building destroyed by fire included additional sum that had to be expended to rebuild building in accordance with building code requirements that had changed since covered building was first constructed." The court did allow some "wiggle room" for the possibility that rebuilding might mean a complete difference in the nature of the building or totally new components added; in which case, because the replacement cost coverage referred to "material of like kind and quality" the exclusion could apply.

We should add that Alaska takes the doctrine of efficient proximate cause perhaps further than do other states. The Alaska special provisions HO 01 54 09 01 prefaces the perils insured against with: "A loss may be caused by a chain of causes. If loss is caused by a chain of causes and a Peril Insured Against is the dominant cause of such loss, we will not deny coverage on the basis that a secondary cause of the loss, in that chain, is not a Peril Insured Against." Typically, now, the anti-concurrent language in a policy will preclude recovery if a covered and a non-covered peril operate to cause a loss. (Additional information on this doctrine and how coverage is affected by policy wording that deals with it may be found at Concurrent Causation and Efficient Proximate Cause, Fire and Marine volume, Miscellaneous Property section.) New York also follows the efficient proximate cause doctrine. See, for example, Parks Real Estate Purchasing Group v. St. Paul Fire and Marine Insurance Company, 472 F.3d 33 (C.A. 2 N.Y. 2006). Here, following the collapse of the World Trade Center, the insured sought to recover when particulate matter from the buildings settled on the insured's buildings' mechanical and electrical systems. Was coverage excluded by virtue of the "contamination" exclusion, or covered by reason of fire and explosion? The court stated that under New York law, "efficient proximate cause rule, applicable when covered and excluded peril combine to cause loss, entitles insured to coverage only if the covered peril is the predominant cause of the loss or damage." (The case was remanded to determine if the particulate matter was, in fact, contamination falling within the exclusionary language.)

The second case to take the approach that ordinance or law is a distinct peril is Dupre v. Allstate Insurance Company, 62 P. 3d 1024 (Col. Ct. App. 2003). The insured owned a ninety-one year old house, which was damaged by fire. At the time of the fire, the house had been rented, although the insured planned to occupy it herself in the coming year. The insurer paid an actual cash value amount pending repair or replacement. The insured's contractor and the local building inspector determined that simply putting the building in its pre-loss state would not satisfy the current building code. Upon learning the policy would not cover the cost of the code upgrades, the insured decided to purchase a modular home to place on the property. The insurer then paid the amount it had withheld for depreciation.

The insured sued for the increased cost of the code upgrades. The trial court upheld the insurer's request for summary judgment, but the appellate court disagreed. The relevant exclusion stated "We do not cover loss or damage resulting directly or indirectly from... Enforcement of any ordinance or law regulating the construction, repair or demolition of dwellings." The exclusion, explained the court, applied only to a physical loss caused by enforcement of building laws and, in this case, the building code requirements did not cause any physical loss. The court said that the definition of "replacement cost" in an insurance policy was "the cost to repair, rebuild or replace the damaged or destroyed part(s) of the building(s) without deduction for depreciation." It was the cost to construct a building with utility equivalent to the damaged building, using current materials and standards. The court added that the "restriction on replacement cost in property insurance policy which limited replacement cost to 'equivalent construction for similar use' did not limit replacement cost coverage to reproduction cost but rather included costs of rendering home habitable by complying with changed building codes' plain meaning including maintaining the home's pre-fire function, home was formerly a habitable dwelling yielding rental income, and merely reproducing the pre-fire condition would have rendered it uninhabitable due to noncompliance with building codes." The court did not agree, however, that the insured should be able to collect the cost of code upgrades for undamaged portions of the building, stating that these fell outside replacement cost coverage.

In some instances, the doctrine of reasonable expectations can stump up against the exclusion. Then, the courts hold that for the exclusion to be upheld, the language in the exclusion must not be "technical or obscure." Lightning struck an insured's home and damaged part of the wiring system. Because the dwelling was sixty years old, it had to be completely rewired to be brought up to code. The insurer agreed to pay for the repairs to the damaged wiring, but not the cost to rewire the entire home. The insured sued. The Oklahoma Supreme Court noted that Oklahoma followed the "reasonable expectations" doctrine, which meant "[u]nder the reasonable expectations doctrine, when construing an ambiguity or uncertainty in an insurance policy, the meaning of the language is not what the drafter intended it to mean, but what a reasonable person in the position of the insured would have understood it to mean." The court went on to say that, following an earlier case, "unclear or obscure clauses in an insurance policy will not be permitted to defeat coverage which is objectively expected by a person in the position of the insured." However, in Spears v. Shelter Mutual Insurance Company, 73 P.3d 865 (Ok. 2003), the court found the exclusion was clear and unambiguous, and so found for the insurer.

A novel means of circumventing the exclusion and obtaining coverage was in the case of Sentinel Management Company v. New Hampshire Insurance Company, 563 N.W.2d 296 (App. Ct. Minn. 1997). The insured owned apartment buildings insured on an open perils policy. Ordinary wear and tear (such as tenants nailing up pictures) caused asbestos fibers to settle within the apartments, particularly on carpeting. The policy excluded loss resulting from wear and tear, but covered ensuing loss not otherwise excluded. In reaching its finding, the court said coverage was not precluded by the exclusion "for damage resulting 'directly or indirectly' from enforcement of any local or state ordinance or law regulating construction, repair or demolition of buildings, since extraneous forces in the form of ordinary wear and tear caused damage, not the fact that insured might one day be required by law to remove released asbestos."

FC&S editors acknowledge the contribution of Donald L. Schmidt, ARM, CEO of Preparedness, LLC, a Sharon, Massachusetts, firm that provides consulting services in the areas of Risk Assessment, Mitigation, Response, and Recovery (www.Preparednessllc.com). Mr. Schmidt provided information on the process by which building codes are developed, adopted, and enforced.

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