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).

The Dupre case can be distinguished from other cases in which courts apply the code upgrade exclusion. In Dupre, the insurance contract excluded loss or damage “resulting directly or indirectly from” code enforcement, which might suggest that the contract was meant to exclude loss proximately caused by the operation of laws or ordinances. While having some surface appeal, this reading is belied by the language in the insurance contract at issue in Dupre insofar as the contract excluded not just loss directly resulting from code enforcement, but also loss indirectly resulting from code enforcement.

A second and more persuasive line of cases, however, holds that language in an insurance contract purporting to limit coverage for “loss occasioned by the enforcement of any ordinance or law” applies regardless of how the property was destroyed. For example, after the impact of Hurricane Andrew in Florida, Dade County required many homeowners to make structural improvements to their homes in order to bring them into line with the South Florida Building Code. In State Farm Fire & Cas. Co. v. Metropolitan Dade County, 639 So. 2d 63 (Fl. Ct. App. 1994), the homeowner's insurance contracts provided replacement cost but did not insure losses resulting from “enforcement of any ordinance or law regulating the construction, repair or demolition of a building or other structure. …” Id. at 65 n. 3. The Florida Court of Appeal held that:

[t]he language in the 'Ordinance or Law' exclusion is susceptible of only one interpretation: no coverage is provided for losses associated with construction regulation enforcement. … The plain, natural meaning of the phrase, alerts the reader to the fact that should enforcement of a construction regulation or law cause additional expenses, the policy does not cover them. Id. at 65.

Other courts have agreed with this natural construction of code upgrade limitations. See Cohen Furniture Co. v. St. Paul Ins. Co. of Ill., 573 N.E.2d 851, 853 (Ill. App. Ct. 1991); Bradford v. Home Ins. Co., 384 A.2d 52, 54 (Me. 1978); see also Bering Strait Sch. Dist. v. RLI Ins. Co., 873 P.2d 1292, 1296 n.5 (Alaska 1994) (recognizing split in authorities).

What is an 'ordinance or law'? A small body of case law addresses the meaning of the “ordinance or law” provision in many wordings. The analysis looks to the view that a reasonable layperson would have of “ordinance or law,” rather than a legal or professional definition of those terms provided by a lawyer or an insurance professional. In Bischel v. Fire Ins. Exch., 2 Cal. Rptr. 2d 575 (Cal Ct. App. 1992), for example, the court held that specifications for dock construction promulgated by the city engineer qualified as a “law or ordinance,” despite the insured's contention that they had not been formally adopted by the state legislature or the city council. The court reasoned that “[w]e find it highly unlikely the average lay policy holder would restrict the meaning of 'law' and 'ordinance' to specific sections of the Civil Code and Government Code.” Id. at 579-580.

The court's reasoning affords weight to the fact that the specifications were published and of general application to all citizens. For instance, the Bischel court cited the dictionary definition of a “law” as a “binding custom or practice of a community: a rule or mode of conduct or action that is prescribed or formally recognized as binding by a supreme controlling authority. …” Id. at 580. In substance, the “law” must be binding or obligatory as opposed to a habit, practice, recommendation or preferred practice. This follows the long-established legal principle that a law is something required by an authority with the power to enforce a requirement. See also Black's Law Dictionary 884 (6th ed. 1990) (“Law, in its general sense, is a body of rules of action or conduct prescribed by controlling authority, and having binding legal force.”) (emphasis added). As the U.S. Supreme Court has held, “laws” are “rules of action or conduct duly prescribed by controlling authority, and having binding legal force …” United States Fid. & Guar. Co. v. Guenther, 281 U.S. 34, 37 (1930). For the purposes of code upgrade provisions, ordinances would be given the same construction as binding rules established at the city or local level, rather than by the state or federal government. See 3 Eugene McQuillin, The Law of Municipal Corporations '15.01 (rev. 3d ed. 1996) (“[o]rdinances have been said to 'amount to laws.'”)

This reasoning also applies to determining those matters that do not constitute a “law or ordinance.” Logically, guidelines promulgated by advisory bodies, such as the National Fire Protection Association or Underwriters Laboratory, are not laws or ordinances, unless they have been adopted by a duly authorized government body. See Mesaba Holdings, Inc. v. Federal Ins. Co., No. Civ. 02-660RHKJGL, 2002 WL 31856384 (D. Minn. Dec. 19, 2002) (holding, in a case involving a policy that included coverage for code upgrades, that municipal ordinance expressly incorporated guidelines and made them mandatory).

This view is consistent with the view expressed in decisions outside the insurance world. A “law,” for example, must be of fixed and general application, “applied without regard to the facts and circumstances of the individual case.” Cordero v. Corbiseirio, 599 N.E.2d 670, 671 (N.Y. 1992). Consequently, one-off agreements between a property owner and regulators, as well as flexible, nonstandardized “guidelines” would not meet the definition of “law or ordinance.”

Conclusion

The government's regulation of building and construction is becoming more extensive and complex. Building codes have become more intricate and demanding, and other statutes, such as the Americans with Disabilities Act, were enacted to promote additional requirements on property owners outside the traditional scope of local building safety codes. New claims are raising the scope of code upgrade insurance contracts with more regularity, and the outcome depends on the wording and circumstance to which it is applied. Whether resolved by adjustment or through a dispute mechanism, it is appropriate for practitioners, courts, and arbitrators to bear in mind the important first principles that define “law or ordinance” and adhere to those principles in the construction of insurance contracts.

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).

The Dupre case can be distinguished from other cases in which courts apply the code upgrade exclusion. In Dupre, the insurance contract excluded loss or damage “resulting directly or indirectly from” code enforcement, which might suggest that the contract was meant to exclude loss proximately caused by the operation of laws or ordinances. While having some surface appeal, this reading is belied by the language in the insurance contract at issue in Dupre insofar as the contract excluded not just loss directly resulting from code enforcement, but also loss indirectly resulting from code enforcement.

A second and more persuasive line of cases, however, holds that language in an insurance contract purporting to limit coverage for “loss occasioned by the enforcement of any ordinance or law” applies regardless of how the property was destroyed. For example, after the impact of Hurricane Andrew in Florida, Dade County required many homeowners to make structural improvements to their homes in order to bring them into line with the South Florida Building Code. In State Farm Fire & Cas. Co. v. Metropolitan Dade County , 639 So. 2d 63 (Fl. Ct. App. 1994), the homeowner's insurance contracts provided replacement cost but did not insure losses resulting from “enforcement of any ordinance or law regulating the construction, repair or demolition of a building or other structure. …” Id. at 65 n. 3. The Florida Court of Appeal held that:

[t]he language in the 'Ordinance or Law' exclusion is susceptible of only one interpretation: no coverage is provided for losses associated with construction regulation enforcement. … The plain, natural meaning of the phrase, alerts the reader to the fact that should enforcement of a construction regulation or law cause additional expenses, the policy does not cover them. Id. at 65.

Other courts have agreed with this natural construction of code upgrade limitations. See Cohen Furniture Co. v. St. Paul Ins. Co. of Ill., 573 N.E.2d 851, 853 (Ill. App. Ct. 1991); Bradford v. Home Ins. Co., 384 A.2d 52, 54 (Me. 1978); see also Bering Strait Sch. Dist. v. RLI Ins. Co., 873 P.2d 1292, 1296 n.5 (Alaska 1994) (recognizing split in authorities).

What is an 'ordinance or law'? A small body of case law addresses the meaning of the “ordinance or law” provision in many wordings. The analysis looks to the view that a reasonable layperson would have of “ordinance or law,” rather than a legal or professional definition of those terms provided by a lawyer or an insurance professional. In Bischel v. Fire Ins. Exch., 2 Cal. Rptr. 2d 575 (Cal Ct. App. 1992), for example, the court held that specifications for dock construction promulgated by the city engineer qualified as a “law or ordinance,” despite the insured's contention that they had not been formally adopted by the state legislature or the city council. The court reasoned that “[w]e find it highly unlikely the average lay policy holder would restrict the meaning of 'law' and 'ordinance' to specific sections of the Civil Code and Government Code.” Id. at 579-580.

The court's reasoning affords weight to the fact that the specifications were published and of general application to all citizens. For instance, the Bischel court cited the dictionary definition of a “law” as a “binding custom or practice of a community: a rule or mode of conduct or action that is prescribed or formally recognized as binding by a supreme controlling authority. …” Id. at 580. In substance, the “law” must be binding or obligatory as opposed to a habit, practice, recommendation or preferred practice. This follows the long-established legal principle that a law is something required by an authority with the power to enforce a requirement. See also Black's Law Dictionary 884 (6th ed. 1990) (“Law, in its general sense, is a body of rules of action or conduct prescribed by controlling authority, and having binding legal force.”) (emphasis added). As the U.S. Supreme Court has held, “laws” are “rules of action or conduct duly prescribed by controlling authority, and having binding legal force …” United States Fid. & Guar. Co. v. Guenther , 281 U.S. 34, 37 (1930). For the purposes of code upgrade provisions, ordinances would be given the same construction as binding rules established at the city or local level, rather than by the state or federal government. See 3 Eugene McQuillin, The Law of Municipal Corporations '15.01 (rev. 3d ed. 1996) (“[o]rdinances have been said to 'amount to laws.'”)

This reasoning also applies to determining those matters that do not constitute a “law or ordinance.” Logically, guidelines promulgated by advisory bodies, such as the National Fire Protection Association or Underwriters Laboratory, are not laws or ordinances, unless they have been adopted by a duly authorized government body. See Mesaba Holdings, Inc. v. Federal Ins. Co., No. Civ. 02-660RHKJGL, 2002 WL 31856384 (D. Minn. Dec. 19, 2002) (holding, in a case involving a policy that included coverage for code upgrades, that municipal ordinance expressly incorporated guidelines and made them mandatory).

This view is consistent with the view expressed in decisions outside the insurance world. A “law,” for example, must be of fixed and general application, “applied without regard to the facts and circumstances of the individual case.” Cordero v. Corbiseirio, 599 N.E.2d 670, 671 (N.Y. 1992). Consequently, one-off agreements between a property owner and regulators, as well as flexible, nonstandardized “guidelines” would not meet the definition of “law or ordinance.”

Conclusion

The government's regulation of building and construction is becoming more extensive and complex. Building codes have become more intricate and demanding, and other statutes, such as the Americans with Disabilities Act, were enacted to promote additional requirements on property owners outside the traditional scope of local building safety codes. New claims are raising the scope of code upgrade insurance contracts with more regularity, and the outcome depends on the wording and circumstance to which it is applied. Whether resolved by adjustment or through a dispute mechanism, it is appropriate for practitioners, courts, and arbitrators to bear in mind the important first principles that define “law or ordinance” and adhere to those principles in the construction of insurance contracts.