CAN I RECOVER THE EXCESS COST TO REBUILD MY BUSINESS IF A LAW OR ORDINACE WON’T ALLOW ME TO REBUILD IN THE SAME SPOT?
Many policies have coverage for any additional costs required due to law or ordinance requirements, however, some do not. What happens when you have a loss but the county will not allow you to rebuild in the same location? Can you consider your building a total loss and receive an increased settlement even if you have a law or ordinance exclusion?
If you don’t have coverage for the increased costs due to law or ordinance, you likely have a policy that has the following language:
- Exclusions
- We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.
- Ordinance or Law
The enforcement of any ordinance or law:
(1) Regulating the construction, use or repair of any property; or
(2) Requiring the tearing down of any property, including the cost of removing its debris.
Generally an insured cannot collect the increase in cost created by a law or ordinance where the insurance policy contains a law or ordinance exclusion and the ordinance merely increases the cost of replacement and did not prevent replacement. The decisive factor in the Florida cases involving this issue is whether the law or ordinance prevented the building from being replaced or repaired versus merely increasing the cost to repair. An important case on this issue was decided in 1966 by the Court of Appeals from the Second District in Netherlands Ins. Co. v. Fowler, 181 So.2d 692 (2nd DCA 1966) in which the court allowed the insured to collect the increased cost of repair when it held the building in this case to be a constructive total loss and said the value policy statute applies. In this case the building was destroyed by fire and the city demolished the building after condemning it as a safety hazard while a motion to compel appraisal was being determined. Id. The court allowed the appraisal award that considered the building a constructive total loss. Id. This case is an example of a law or ordinance that prevented the building from being repaired.
The Florida Supreme Court has allowed recovery of increased cost due to a law or ordinances that prevented repair when the Court held that such Law or Ordinances “are part of the contract of insurance, and that the insurer is bound thereby” in The Citizens Ins. Co. v. Barnes, Simpson, Carlson, and First Nat’l Bank of Milton, 124 So.722 (Fla. 1929). The court went on to say, “where parties contract upon a subject which is surrounded by statutory limitations and requirements, they are presumed to have entered into their engagements with reference to such statute, and the same entered into and becomes a part of the contract.” Id. Once again, this case involved a law or ordinance that prevented repair of a frame building when the damage exceeds more than 50% of the cost to reproduce. Id.
Reliance Ins. Co. v. Harris, 503 So.2d 1321 (Fla. 1st DCA 1987), held that a building will be considered a “constructive total loss” and the insurer is liable for the building’s entire value, under circumstances where an ordinance prevents repair. In this case the local ordinance or building code required the building to be demolished. The insurer argued that the building would not have been a total loss but for the insured’s failure to repair or replace the building, or to mitigate the damages as allegedly required in the policy. The court found the breach of the duty to mitigate was through no fault of the insured because the insurer did not repair or replace and the building was subsequently demolished. Id.
The case of Regency Baptist Temple v. INA, 352 So.2d 1242 (Fla. Ct. App., 1st Dist. 1977) made a distinction between a law or ordinance preventing replacement or repairs on a building versus a law or ordinance that merely increased the cost to repair. In this case, the court held the insurer was only responsible for the cost to repair and not the increased cost of repairs to meet building code requirements.
Based on these cases, it appears that there is a distinction between preventing replacement and merely increasing the cost to repair which can become important. If the building code only increases the cost to repair, courts will likely not allow recovery in Florida for the extra expense and will likely give the “Law or Ordinance” clause full effect. However, other courts have held that insurers are liable for the amount necessary to comply with mandatory building codes even when the ordinance merely increases the cost of repair, but these opinions are based on the “expectancy theory” which Florida does not follow. Starczewski v. Unigard Ins. Group, 810 P.2d 58 (Wash. App. Div. One 1991) held “as a matter of law, the average person would believe that “the amount necessary to repair or replace the damaged property includes the amount necessary to comply with mandatory building codes enacted after the policy was issued.” This case involved a building code that required demolition of the building and remodeling to conform to the building code standards. Id. The court found the “efficient proximate cause” rule prevented the “Law or Ordinance” clause from being effective since any additional repair costs due to code requirements resulted from the fire, not from the enforcement of any ordinance or law. Id.
In Garnett v. Transamerica Ins. Service, 800 P.2d 656 (Idaho 1990), the court dealt with a loss of a commercial building and a building code that required a minimum side street setback and on-site parking requirements. Id. at 662. The court held insureds were entitled to payments for improvements to damaged property required by local building codes. The court found that “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.”
The Supreme Court of Alaska held replacement cost coverage included expenditures attributable to building code changes under the reasonable expectation doctrine in Bering Strait School District v. RLI Ins. Co., 873 P.2d 1292 (Alaska 1994). In order to rebuild the school that was destroyed by fire in accordance with the current building codes, an additional $206,466 had to be expended. Id. at 1293. The insurer refused to pay this extra amount. Id. The court said “building owners buy replacement cost insurance so that if their buildings are destroyed they can be replaced and their uses restored without cost.” Id. This court cited Garnett above as well as Starczewski in support of its holding.
Bering Straits cannot be considered to have precedential value because Florida does not follow the “reasonable expectations” doctrine. State Farm Fire & Cas. Ins. Co. v. Deni Assoc. of Florida. 678 So.2d 397 (Fla. Ct. App. 4th Dist. 1996) held that Florida follows the “objective” theory of contractual intent rather than the “reasonable expectation” theory. Id. at 399. The court stated, “insurance contracts are construed in accordance with the plain language of the policies as bargained for by the parties. Ambiguities are interpreted liberally in favor of the insured and strictly against the insurer who prepared the policy. Id. at 400. If you policy has the Law or Ordinance exclusion like the one cited above, Florida Courts will likely considered that language unambiguous and its plain meaning will be given effect. Therefore, Florida courts will likely give the exclusion its plain meaning and not impose liability on the insurer for the extra expense of complying with the building code.
If the ordinance is not preventing the replacement of the building but merely increasing the cost to rebuild it is likely not recoverable unless you have specific law and ordinance coverage. According to the case law above, insurers are not liable for the extra expense of rebuilding or replacing if the policy contains a “Law or Ordinance” exclusion. If the ordinance prevented rebuilding or required demolition, then the “Law or Ordinance” exclusion would likely not apply and the insurer would be liable.