Property Insurance Coverage Law Blog : Florida Insurance Lawyer & Attorney : Merlin Law Group Law Firm : Tampa, Houston, Coral Gables, Gulfport

Here is my interview of Ray Kirby:

Insurance carriers may dispute the extent of damages to a roof and issue payment to the policyholder to repair areas of the roof that the insurance carrier agrees were damaged by a hurricane. If the policyholder takes that insurance claim payment, hires a roofer and signs a contract for roof repairs, they will likely file a repair permit application with the local building code department. The Ordinance or Law additional coverage can be triggered if the building code department rejects the permit application because the building code requires certain upgrades, so that complete replacement of the policyholder’s roof is necessary. Building code departments have many different reasons for rejecting repair permits, but the most common reason is when the percentage of repairs exceeds 25% of the total roof area. It may also be that the building code requires the roof to be replaced because of certain required code upgrades (such as tie downs, etc.) that cannot be accomplished without the replacement.

Residential insurance policies that contain the additional coverage for Ordinance or Law may contain a provision worded similarly to this example:

Ordinance or Law

You may use up to 25% 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:

The construction, demolition, remodeling, renovation or repair of that part of a covered building or other structure damaged by a Peril Insured Against;

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.

The typical Ordinance or Law provision states that a policyholder may use the additional coverage for increased costs incurred when building codes require the removal of the undamaged part of the building to complete repair to the area of the building that was damaged by the loss claimed. In the roof example, replacement of the entire roof would be covered, if it were required by building codes.
In Florida, one way for policyholders to claim this additional coverage is to demonstrate that they have “incurred” the expense that the code upgrade requires. In the roof example, that may include providing the insurance carrier with the signed contract for replacement of the roof, along with the permit application, rejection and documentation from the building department.

Again, it is important for Florida policyholders to be aware of Ordinance or Law coverage and to speak with their agents, public adjusters or attorneys to verify if their policy contains this coverage and also whether they can use the coverage under their particular situation.

At its very basic form, the standard ISO CP 00 30 "Business Income (and Extra Expense) Coverage Form" states that:

"period of restoration" does not include any increased period due to the enforcement of any ordinance or law that regulates the construction, use or repair, or requires the tearing down of any property.

Most business policies also have a standard ISO CP 00 10 “Building and Property Coverage Form,” which will provide coverage for the increased costs incurred to comply with the enforcement of new building codes up to a cap or limit. However, the delay in repairs or replacement caused by complying with the required forms may still not be covered by this basic form.

Large-scale business owners, should speak with their brokers about company or manuscript forms that provide not only complete coverage for the increased costs, (i.e., not limited to a percentage), but will also provide coverage for the period of time required to adhere to the code upgrades. Typical wording is the following:

Increased Cost of Construction
This policy also covers any increase in the Business Interruption and extra expense loss arising out of the additional time required to comply with state law or ordinance.

All business owners should call their agents to give their policies a little spring check-up on code upgrade coverage.

Most policies exclude coverage for the costs of complying with building laws. Typical exclusion language reads as follows:

We do not insure under any coverage for any loss which would not have occurred in the absence of one or more of the following excluded events. We do not insure for such loss regardless of: (a) the cause of the excluded event; or (b) other causes of the loss; or (c) whether other causes acted concurrently or in any sequence with the excluded event to produce the loss; or (d) whether the event occurs suddenly or gradually, involves isolated or widespread damage, arises from natural or external forces, or occurs as a result of any combination of these:

a. Ordinance or Law, meaning enforcement of any ordinance or law regulating the construction, repair or demolition of a building or other structure, unless specifically provided under this policy.

This type of exclusionary provision can be devastating. In State Farm Fire and Cas. Co. v. Metropolitan Dade County, 639 So.2d 63 (Fla. 3rd DCA 1994), the local government required homeowners to bring their properties into full compliance with the South Florida Building Code after Hurricane Andrew. Dade County sued State Farm for a declaration that such upgrades were covered losses.

State Farm argued that it was only liable for hurricane damage, and not the "increased costs" from the enforcement of local codes. The lower court found the exclusionary language ambiguous, and found coverage for the homeowners. The appellate court reversed, upholding that ordinance and law exclusion specifically stated that the losses occurred only because of the enforcement of the code - the "ordinance and law" - and that the exclusion clearly and unambiguously prohibited payment under those circumstances.

Today, insurers are forced to offer law and ordinance coverage by law. If the insured does not obtain a policyholder’s written refusal of law and ordinance coverage, any policy covering the dwelling is deemed to include the law and ordinance coverage--limited to 25% of the dwelling limit. See, Fla. Stat.§627.7011

Please note that despite the language in Florida Statute §627.7011, an insured is also permitted to reject any such coverage, and instead receive compensation based on the value of the repairs (ie. replacement cost coverage), without the need for additional code upgrade compliance.

In any given case, however, code upgrade coverage will greatly depend on the language of the policy in question and the type of coverage that the policyholder has elected to purchase. As with any other insurance provision, any ambiguity should be resolved in favor of the insured.

Many courts have interpreted the often contradicting code upgrade exclusions. While the case law is certainly conflicting on this issue, many courts have ruled that code upgrade losses are covered, despite the exclusionary language, if they are an efficient proximate cause of a covered peril, but not on their own. Garnett v. Transamerica Insurance Services, 800 P.2d 656 (Idaho, 1990) is illustrative of these cases. There, a fire damaged a commercial building owned by the Garnetts and insured by Transamerica. Local building codes required various upgrades to the building, and Transamerica denied coverage for those costs based on the policy's code upgrade exclusion. The court narrowly read the exclusion, which was preceded by anti-concurrent language [loss occasioned directly or indirectly] to apply only where the loss itself is caused by a law or ordinance, not where a law or ordinance required upgrades after a loss:

As we read this provision, it does not limit Transamerica's 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. For instance, if some safety improvement of a building to which no other loss had occurred were required by an ordinance or law, Transamerica would not be liable. However, when the cost of repairing or replacing a building that had been damaged by fire is increased by the requirements of an ordinance or law, Transamerica is not relieved of that cost.

If specifically purchased, code upgrade coverage will generally provide coverage for the increased cost of complying with building codes governing the repair, reconstruction, or demolition of the damaged property. Some of the most contested issues in code upgrade coverage cases is whether there is coverage for the costs of complying with preexisting code violations and whether the insurance company is liable to pay for the cost incurred as a result of a law or ordinance that took effect after the date of loss. Of course, the answer to these questions will greatly depend on the language of the policy and the jurisdiction where the coverage dispute arises.

For an insightful discussion of how code upgrade coverage can also provide coverage for the cost required to correct pre-existing code violations and grandfathered-in code provisions, please refer to Chip’s blog entry, Increased Cost of Compliance to Code and Ordinance of Law Coverage for a Typical Loss Situation.

On the other hand, the insurer’s liability for post-loss enacted codes likely will turn on the policy’s language. If the policy specifically limits the insurer's liability to those increased costs necessitated by laws and ordinances “in force at the time of loss,” that limitation should be upheld because courts will enforce policy language that is plain and unambiguous as written. A more difficult question arises in cases where the in force type of language is not present. However, insurers could reasonably argue that there is no coverage under the endorsement for the increased cost of construction due to building laws and ordinances that took effect after the date of loss. Then, a policyholder may argue that there is coverage for the costs of complying with post-loss enacted laws and ordinances in the absence of any explicit language limiting the coverage. He may also argue that it is reasonable to expect such coverage under the replacement cost provision, absent any language to the contrary.

At least one federal district court has rejected similar policyholder arguments and held that an insurer was not liable for the cost of complying with post-loss enacted building codes. See B A Properties, Inc. v. Aetna Casualty & Surety Co., 273 F.Supp. 2d 673 (D.V.I. 2003). In BA Properties, the policy did not include any “in force at the time of the loss” language. However, the court rejected the insured’s argument because the replacement cost provision determined the value at the time of the loss and interpreting the law and ordinance provision otherwise would alter its interpretation of the clear and unambiguous replacement cost provision.

In my opinion, B.A. Properties is a well reasoned decision and other courts will likely follow it, despite a policy’s silence with respect to post-loss code enactment.

Before getting to the holding, I thought there were two discussions in the opinion concerning this coverage, often called “Code Upgrade Coverage,” worth noting. First, the Court interpreted the policy as a common policyholder would, reading and contemplating what the policy meant in the circumstances of the loss. Second, the Court highlighted a practical admission by the insurance adjuster-- this type of coverage is confusing and repeatedly subject to disputes. Citing to another opinion, the Court noted:

“Generally, we read insurance policies as the average lay purchaser of insurance would. Here, Commonwealth has complicated the matter by incorporating a law-the building code-into its definition of coverage. Thus, Commonwealth's coverage extends to repairs to undamaged parts of a covered building if the repairs result from enforcement of any law or ordinance. If we read the policy as Commonwealth urges, the average purchaser of insurance would probably not understand its coverage without consulting an attorney to analyze the applicable building code sections. And this would largely frustrate the law's intent to encourage insurance companies to plainly write their coverage so laypersons can understand it….

... [T]he test is not what the building official reasonably believes the code allows him to do. Nor is it what a lawyer or judge believes the code allows. Rather, the test is what a reasonable lay insurance purchaser would believe the code allows the city to enforce.”

The court reasoned that “[a] reasonable lay purchaser of insurance would conclude that the building official has authority under [the unsafe structures section of the building code] to require alterations to existing, nonconforming uses that are dangerous to human life.”

The last footnote in the opinion also showed how important depositions can be to coverage opinions:

“Notably, in his deposition, GNY's senior claims examiner Robert H. Penn admitted that the policy language was unclear: “There are gray areas in this coverage and ... it is the subject of much discussion and debate even today. This coverage has been around a long time and the wording has changed over the years, but it is a coverage that almost always there are disputes every year with every company that writes commercial insurance.”

The summary of facts reveals that the insured alleged that policy required coverage for loss when it was required to bring non-damaged floors of its building into compliance with building code after a windstorm caused damage to one floor. The trial entered summary judgment in favor of insured, and insurer appealed.

The policy language in dispute was:

“3. Coverage C-Increased Cost of Construction Coverage

a. If a Covered Cause of Loss occurs to the covered Building property, we will pay for the increased cost to:

(1) Repair or reconstruct damaged portions of that Building property; and/or

(2) Reconstruct or remodel undamaged portions of that Building property whether or not demolition is required;

when the increased cost is a consequence of enforcement of building, zoning or land use ordinance or law.”

It should also be noted that Paragraph F of the Ordinance or Law Coverage section excluded “loss due to any ordinance or law that [the insured was] required to comply with before the loss, even if the building was undamaged” but the insured “failed to comply with.” However, that language did not apply because, at the time of the original construction, the building was in compliance with the Code and the insured was not required to rebuild to the new Code before the loss because it had been “grandfathered in.”

Now why this case is so important to policyholders is because the areas that the building officials required to be repaired to new Code were not connected to the damaged portions being repaired—these new Code repairs only came about because of the windstorm damage in other areas of the building. The Court specifically noted the contentions of the parties:

“In other words, defendant contends that there is an insufficiently direct connection between the wind damage to the seventh floor and the code official's direction that plaintiff make repairs to the other floors of the structure. Defendant analogizes the situation to one in which building inspectors arrive to inspect covered damage and fortuitously “happen” to notice other unrelated code violations or unsafe conditions, which they require the owner to fix. We disagree with all of these contentions.

Both parties agree that when a damaged building must be repaired or reconstructed, it is not unusual for building code officials to require that the work be performed consistent with current construction code standards, which may not have existed when the structure was built. Thus, there is no dispute that the clause in question applies to the increased costs of bringing the damaged portions up to current code standards…

The parties also agree that the clause would apply to undamaged portions of the same structure which must be brought up to code in the course of repairing the damaged portion. For example, if a portion of a wall collapses, and as result, code officials require the entire wall to be reconstructed using code-compliant materials, there is coverage.

The parties, however, disagree on whether the clause applies where the damage to one portion of a building causes code officials to require repairs to separate, undamaged portions of the building. GNY contends there is never coverage in this situation. Plaintiff contends that there is always coverage so long as “a covered cause of loss occurs” and the insured incurs “increased cost of construction ‘as a consequence of’ building code enforcement as a result of the covered loss….”

In this case, counsel for DEBS argued that a Tennessee case, Davidson Hotel Co. v. St. Paul Fire & Marine Insurance Co., 136 F.Supp.2d 901 (W.D.Tenn.2001), controlled. In Davidson, a water leak in a hotel led to a thorough inspection by city building inspectors, who “required compliance with numerous building code provisions” discovered during the inspection. The insured sought coverage for the cost of compliance with the building codes. The court found coverage:

“The language of [the quoted insurance] provision is clear. The provision applies to the “enforcement of any law or ordinance in effect at the time of covered loss.” The breadth of the provision is not diminished by any limiting language regarding the “grandfathered” status of code violations, as St. Paul would have the Court hold. The main limitation upon this provision is the causal connection required between the loss and the enforcement. Davidson has shown this causation through deposition testimony of several building officials involved in the inspection process. The testimony makes clear that, in the first place, the inspection occurred only because of the incident giving rise to liability and, secondly, the thoroughness of the inspection was also a result of the incident. The Court finds that the proximate cause of the inspection was the February 16, 1998, event, and therefore, that the plain language of this provision renders St. Paul liable for costs associated with code compliance.”

The Court specifically noted that this case was different than Davidson and it did not have to stretch the causation that far to find coverage under the policy:

“…there is a clear causal connection between the collapse of the seventh floor wall and the code official's mandate that plaintiff bring the remaining floors into compliance to prevent them from collapsing. Our courts have adopted the proximate cause test for determining coverage:

Where a peril specifically insured against sets other causes in motion which, in an unbroken sequence and connection between the act and final loss, produced the result for which recovery is sought, the insured peril is regarded as the proximate cause of the entire loss. It is not necessarily the last act in a chain of events which is, therefore, regarded as the proximate cause, but the efficient or predominant cause which sets into motion the chain of events producing the loss. An incidental peril outside the policy, contributing to the risk insured against, will not defeat recovery.... In other words, it has been held that recovery may be allowed where the insured risk was the last step in the chain of causation set in motion by an uninsured peril, or where the insured risk itself set into operation a chain of causation in which the last step may have been an excepted risk.

We need not decide here the precise outer reaches of coverage under the clause at issue. Unlike Davidson, supra, this was not a case in which the local inspector happened to be in the building because of the wall collapse and fortuitously discovered one or more unrelated code problems. There was a direct connection between the covered damage and the additional work required to the building.

…the prior nonconforming condition was considered legally acceptable before the disaster occurred. …Further, the required upgrades concerned the same structural part of the building…, the same building code provision, and the same type of repair (installation of angle irons).

The language of the policy itself also supports our conclusion that there is coverage here. In this case, the policy explicitly excluded pre-existing code violations which the insured had failed to correct. However, the policy did not specifically exclude situations where, as here, a covered structure was grandfathered under the current code but lost its grandfathered status because of the occurrence of covered damage…. the case is analogous to the situation in Regents, where repairing the fire damage triggered ADA-related expenses in remodeling undamaged portions of the building. If the insurer intended to exclude coverage in such situations, it could have specifically so provided. See Feinbloom v. Camden Fire Ins. Ass'n, 54 N.J.Super. 541, 544-45, 149 A.2d 616 (App.Div.), certif. denied, 30 N.J. 154, 152 A.2d 172 (1959) (finding coverage for the entire loss where, by operation of local zoning law, the insured was required to raze rather than repair a nonconforming structure that suffered extensive fire damage); Danzeisen v. Selective Ins. Co. of Am., 298 N.J.Super. 383, 388-89, 689 A.2d 798 (App.Div.1997) (insurer failed to craft clear policy language to avoid the Feinbloom rule).”

There is just one final point which is important to me. The 1959 Feinbloom decision was the result of a very creative public adjuster, Ira Sarasohn. After I left Paul Butler and the world of representing insurance companies for helping policyholders in February 1985, Ira Sarasohn was one of two public adjusters (the other being Dick Tutwiler to immediately suggest that their clients consider me as a possible legal counsel. I was only twenty-six at the time they made those recommendations. Sadly, Ira has passed, but we often talked about the Feinbloom case and how insurance policies, if interpreted from the standpoint of the policyholder, can help soften the financial blow caused by the impact of a loss. More insurers should adopt Ira Sarasohn’s view and write their products in a way that would truly help their customers after a loss.

I first came across Winans when he sent me an article he wrote, Florida Flirting with Hurricane Insurance Disaster, published by the International Risk Management Institute in 2008. At the time, I was on the Citizens Property Insurance Corporation's Mission Review Task Force. Winan's views are worthy of reflection. Florida will be flirting with that potential financial disaster for some time, although the recent laws allowing rate changes to Citizens will help place them on a much sounder actuarial method of premium rates.

Here were the points from Winan's presentation this morning:

Prepare your insurance policy

1. Do you have proper coverage--

• Flood?

• Excess flood?

• Ordinance and law?

• Offsite power outage?

• Business Interruption/Extra Expense?

• Contingent Business Insurance coverage?

2. Do you have enough coverage—

• Building?

• Contents?

• Inventory?

• Business Interruption/Extra Expense?

3. Your insurance policy—

• Get a complete copy

• Put it in a safe/accessible place

Prepare for the storm

4. Put a catastrophe plan in place

5. Prepare for cash needs

6. Take photos and videos now

7. Back up and protect critical data

After the storm

8. Document the damage

• Photos and videos

• Don’t throw damaged items away

• Save receipts

9. Protect your property from further damage

10. Beware of contractors wanting…

• Cash

• To start without documentation

• To contract non-emergency work

• Payment in full

Policyholders should start on the first four points immediately. Summer is here and the water is warming everyday. Sometime and somewhere, there will be a tropical cyclone threatening the Coastal region before the cooling days of November.

I suggest that those with Chinese drywall problems read "Solving the Chinese Puzzle of Contaminated Drywall: Owners and Builders Seek Redress for Defective Drywall Installed in Homes" as a basic reference for the expected coverage issues.

Tens of thousands of residential structures are affected, as well as  condominiums, apartments and commercial structures. Homeowner’s and commercial "all-risk" policies may have a number of triggers for damage, but the primary exclusions which may affect coverage are noted in this article:

"There are a number of exclusions, however, that can make the coverage for defective drywall claims problematic. For example, losses caused by the following perils are typically excluded:
• Wear and tear, marring, deterioration
• Inherent vice, latent defect, mechanical breakdown
• Smog, rust, mold, wet or dry rot
• Release, discharge or dispersal of contaminants or pollutants
• Settling, cracking, shrinking, bulging or expansion of pavements, patios, foundations, walls floors, roofs or ceilings."

The discussion of the exclusions suggests that the authors believe homeowners all-risk policies will face significant coverage issues:

"Deterioration’ is a gradual decline or reduction in a property’s value resulting from a decline in physical condition. It can be caused by action of the elements or by ordinary wear and tear. A ‘latent defect’ is customarily one that cannot be discerned by a normal inspection of the property by its owner and must be identified by an expert’s investigation. It could be argued that this type of exclusion is applicable to the defective drywall claims, since the material appears normal to the layperson but can be identified as defective by a consultant’s investigation or by analysis of its composition. ‘Inherent vice’ is a condition in an insured property that has the potential to cause damage to portions of the property other than the part containing to portions of the property other than the part containing the inherent vice.

The Chinese drywall, it may be argued, exhibits this property since gases emitted from the drywall have been alleged to cause corrosion of metals, including the wiring, plumbing and air conditioning coils in homes where it has been installed. In some cases, the pollution exclusion in a homeowners policy may arguably apply to the release of harmful gases from the drywall that are damaging plumbing, wiring, heating and air conditioning systems, appliances, computers and electronic equipment. Even the odor may be regarded as a release of a pollutant or contaminant, although it is not clear that the incorporation of pollution exclusions in property damage policies was intended to apply to releases that are contained within the insured structure and involve non-industrial materials. Counterarguments can be made that the pollution exclusion should apply only to releases of hazardous materials that impact the environment, but not to damage to the structure, building materials or furnishings within a structure.

Some homeowners policies also contain exclusions for construction defects. This exclusion is included with the thought that an alternative course of action is available to the homeowner: an action for breach of warranty against the contractor and subcontractors that built the home. Even where this exclusion is not included in the policy, some courts have denied coverage for defective construction or materials claims, since damage to the drywall did not occur during the policy period – it was already defective when it was installed and is in the same condition when the problem is discovered. Other courts have concluded that there is no occurrence or event giving rise to the alleged loss where the defective material is unchanged from when it was installed. The damage to the plumbing, wiring, air conditioning, appliances and computers may be excluded as deterioration (e.g., gradual damage), or as rust or corrosion. There are, however, jurisdictions that regard the installation of the defective drywall as an ‘occurrence’ and consider the damage to be ongoing during the term of the policy even though the defective material itself may not be altered after its installation.

In summary, homeowners policies are not likely to respond to the costs of tearing out and replacing the defective drywall. And although they might pay for the ensuing loss to the wiring, plumbing, air conditioning and appliances, there is no guarantee, however, as these losses may also be impacted by exclusions for mechanical breakdown."

The last sentence is discouraging. Many insurance defense attorneys have confided some concern regarding the "ensuing loss" provisions of some policies. "Ensuing loss" provisions are the Lazarus clauses in property insurance policies. I strongly suggest you read Water Loss Denied? Ensuing Loss Provisions May Provide Coverage and consider how the various Chinese drywall fact patterns may impact possible coverage. I also strongly suggest you determine what local building and safety codes apply, and then carefully read the Ordinance and Law coverage and endorsements of the policy at issue.

So, what is the answer? While I like to be certain rather than give wimpy answers, it depends on the policy, the law that applies, and the facts of the loss. Some Chinese drywall is not as bad as other Chinese drywall. The particular facts of each case and causation issues first determine what exclusions, limitations and exceptions may apply.

I suggest you ask these questions when making the analysis:

• What is the problem with the drywall?
• How will it be fixed and what non-drywall areas will be impacted?
• What problems from the drywall are causing damage to other areas of the structure and what are those damages to the non-drywall areas?
• What exclusions and ensuing loss provisions may apply?
• What laws or ordinances regulate the need to replace or affect the method of repair?
• What state law applies?

I do not want to give away too much of my analysis to the bright defense attorneys reading this post. However, for those who opine there is no coverage, we all know some attorneys who give opinions like that and then later blame judges when it turns out they were wrong.

One thing is certain--there are a lot of these cases and the insurance industry is not advertising for cliams to be turned in. There will be litigation on these issues.