(Note: This Guest Blog is by Michelle Claverol, an attorney with Merlin Law Group in the Coral Gables, Florida, office. This is the seventh in a series she is writing on valued policy laws).
When a building has been damaged or destroyed by a covered peril, a policyholder may face an additional loss because building laws and ordinances governing the repair, reconstruction, or demolition of the insured property can significantly increase the costs. In most instances, these laws and ordinances will require that the repairs or reconstruction of a damaged structure comply with current building codes.
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.