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The Costs of Code Upgrades
When a property is physically damaged by some insurable event ' such as a flood or fire ' laws or ordinances that were not in place when the original property was first constructed must be considered in the repairing or rebuilding of that property. After Hurricane Andrew in 1992, for example, Dade County Florida required that ruined houses be rebuilt in compliance with stricter severe-weather standards than the damaged houses had previously exhibited. These upgrade requirements must be reconciled with replacement-cost insurance for property owners, which puts the insured in the same position, with the same quality of property, as existed before the insured event ' not in a better position, with a higher quality of property (eg, a stronger roof, better ventilation, wider egresses, and the like). Consequently, courts, insurers and insureds need to resolve the question of which party pays the costs of compliance with changed construction codes.
The courts offer several lines of analysis. Where contracts are silent on the matter, some courts find coverage for code upgrades to be part of the replacement coverage, while the majority seems to hold that it is not. In other circumstances, replacement insurance contracts expressly address the cost of code upgrades between the parties. To illustrate, the contract may say that the policy does, or does not cover, “any loss occasioned by enforcement of any local or state ordinance or law regulating the construction, repair or demolition of buildings.” Allowing for these variations in wording, the case law focuses on a number of key analytic questions.
When is loss occasioned by the enforcement of ordinance or law? Courts have interpreted language addressing coverage for “loss occasioned by the enforcement of any ordinance or law” in several ways. In one line of cases, courts limit the reach to property that is actually affected by the operation of an ordinance or law ' for example, where the authorities destroy a house pursuant to a statute authorizing the razing of houses to stem the spread of a fire, or where the police, pursuant to statute, demolish a house used in connection with drug-trafficking. The reasoning ignores the express undertaking in some wordings to insure the damage done to stop the spread of conflagration and appears to be based on the view that the code limitation wording does not operate independently. See Dupre v. Allstate Ins. Co., 62 P.3d 1024, 1029-30 (Col. Ct. App. 2003) (policy insuring all risks caused by “physical loss” could not exclude the cost of code upgrade limitations). See also Farmers Union Mut. Ins. Co. v. Oakland, 825 P.2d 554, 555 (Mont. 1992) (same); Garnett v. Transamerica Ins. Servs., 800 P.2d 656, 666 (Idaho 1990) (same).
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