Every now and then, Courts follow the rule of law that insurance policies are supposed to be interpreted as a regular person would do so—not as a trained insurance law expert would interpret them. In DEB Associates v. Greater New York Mutual Insurance Company, 407 N.J. Super. 287, 970 A.2d 1074 (N.J.Super. A.D. June 1, 2009), the court granted coverage for the increased costs of construction caused by pre-existing building codes. The court followed this rule.

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.