Typical property policies include an exclusion for law and ordinance coverage, i.e., when the insured property suffers a loss requiring repair, the policy does not cover costs of repairs required to comply with building codes. The issue of law and ordinance coverage typically arises in older buildings that are not up to code at the time of the loss, and then are required to be code compliant before a certificate of occupancy is issued after repairs are completed. Some policies, typically by endorsement, provide ordinance or law coverage for an additional premium.
In Reichert et al., v. State Farm General Insurance Company, 2012 Cal. App. LEXIS 1334 (4th App. Cir., Div. Three, Dec. 28, 2012), the insureds’ house was demolished by order of the City of Huntington Beach after building inspectors discovered that a remodeling project did not conform to floodplain regulations. The insureds brought a negligence action against their architect and contractor and also submitted a claim to their homeowners’ insurer. The insurer denied the claim on the basis that the demolition was not an accidental loss and, regardless, the loss was excluded by the policy’s law or ordinance exclusion. Thereafter, the insureds filed suit against their insurer and the insurer successfully moved for summary judgment.
On appeal, the California Court of Appeals for the Fourth Appellate Circuit affirmed the trial court’s grant of summary judgment for the insurer. In doing so, the court held that the policy’s law or ordinance exclusion applied to bar coverage. The exclusion provided as follows:
We do not insure under any coverage for any loss which is caused by one or more of the items below, regardless of 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:
- Ordinance or Law, meaning enforcement of any ordinance or law regulating the construction, repair or demolition of a building or other structure.
In interpreting this provision, the Reichert court noted a split in authority concerning whether, after a loss from a covered peril, a first-party property insurer is required to pay for code upgrades required to replace the lost or damaged property, even if the required upgrades result in the insured effectively receiving something better than they had pre-loss. The court characterized the split as “anti-windfall” cases verses “pro-compliant” cases and acknowledged that although it did not directly impact the case before it, the relevant case law shed light on the application of the policy’s law or ordinance exclusion.
For example, the court found the “pro-compliant” cases instructive for noting that the clear intent of the law or ordinance exclusion is to exclude loss caused by the law or ordinance itself as opposed to, for example, a fire. The court also noted that the law or ordinance exclusion had been consistently applied to losses caused by the enforcement of a local building ordinance or law. Given that the undisputed facts in Reichert demonstrated that the loss was caused by the proper enforcement by the city of Federal Emergency Management Agency (FEMA) floodplain regulations the court concluded that the law or ordinance exclusion plainly applied.
The Reichert court also rejected two attempts by the insured to sidestep the application of the law or ordinance exclusion. First, the insureds argued, without elaboration, that the policy’s “Option OL” provided coverage for losses resulting from building, zoning or land use ordinances. “Option OL” is a seldom-litigated provision that provides protection against the extra costs or repairs necessitated by code upgrades. It first appears on the subject policy’s declarations page under forms and endorsements as “OPT OL BLD ORD/LAW – 25%” and is also listed under the general heading of “Optional Policy Provisions.” In the body of the subject policy, “Option OL” is implicated in four different sections. The first section is entitled “Coverage Provided” and explains that the total limit of insurance provided by the Building Ordinance or Law provision will not exceed an amount equal to the Option OL percentage shown in the Declarations. The second section appears under the heading “Damaged Portions of Dwelling” and explains that the increased costs caused by enforcement of laws or ordinance is covered, as long as the enforcement is caused by the “same Loss insured.” The third section, “Undamaged Portions of the Damaged Dwelling” roughly tracks “Damaged Portions of Dwelling” except that it focuses on the payment an insurer is required to pay to undamaged portions of a building. Finally, the policy’s “Building Ordinance or Law Coverage Limitations” spells out the limits on the payments for required code upgrades contemplated by the other sections. In summarily rejecting the insureds’ “Option OL” argument, the court concluded that while “Option OL” can provide additional recompense for a covered loss, it does not provide coverage in the first instance. “Option OL,” therefore, did not impact the application of the law or ordinance exclusion.
Finally, the insureds contended that the efficient cause of their damage was not the governmental enforcement action, but the third party negligence of their architect or contractor, and therefore their loss was covered despite the law or ordinance exclusion. The Reichert court rejected this claim on the basis that the policy’s faulty workmanship exclusion broadly excluded losses from third-party negligent conduct.