Reichert v. State Farm General Insurance Company
Court of Appeal, Fourth District (January 24, 2013)
Many Homeowners Insurance Policies have exclusions for increased costs from “law or ordinances” (for example, code upgrades) required to make repairs following a loss to the property. On top of that, some policies have language which purports to provide an insured with additional coverage for such upgrades or additional repair costs. Policies often include both the optional coverage and the exclusion. This case considered whether such optional coverages themselves overcome the law and ordinance exclusion.
Eric and Lizbeth Reichert attempted a remodel of their newly-purchased Huntington Beach house, which sat in a designated flood zone. They went through a couple of sets of plans, which ultimately required that a number of walls be left in place. A problem arose during construction when the contractor’s superintendent noted that the existing walls were eight feet tall, and all new walls in the plans were to be 10 feet tall. When he brought this to the attention of the contractor and the architect, he was told to tear down all the walls. He did, and work on the structure progressed. Unfortunately, at the next City inspection, it was discovered that the project now exceeded the scope of the permit, and also potentially took the project out of compliance with the City’s flood plain requirements. A stop work order was issued, and what was left of the structure in progress was subsequently torn down by order of the City.
The Reicherts sued their architect and their contractor, and also made a claim to State Farm under their homeowners’ insurance policy. The policy contained a fairly standard law or ordinance exclusion, which stated that the carrier did not insure under any coverage for any loss caused by “a. Ordinance or Law, meaning enforcement of any ordinance or law regulating the construction, repair or demolition of a building or other structure.” When the carrier denied the claim based on the exclusion, the Reicherts sued. The carrier brought and won a summary judgment motion before the trial court, and the Reicherts appealed.
The Court of Appeal affirmed the trial court, holding that this was “a rather clear example” of a law and ordinance exclusion. The Court first noted that past decisions determining whether such exclusions were intended to cover, for example, code upgrades, showed that the clear intent of the exclusion was that coverage was to be excluded when the law or ordinance itself, as distinct from a fire or other condition, was the cause of the loss. Here, the demolition of the residence was pursuant to an order of the City, based on its zoning and flood plain ordinances. This itself was the cause of the loss in question, not a fire or some other “accidental” cause. As such, the loss was properly excluded.
The Reicherts pointed to an additional portion of the policy, “Option OL,” which dealt with “Building Ordinance or Law,” and argued that this provided them further coverage under the policy. “Option OL” provided additional monies to be paid on top of the policy limits under certain situations for code upgrades or increased building costs due to law or ordinances requiring something different be constructed than originally existed. However, the Court noted that while “Option OL” provides additional reimbursement for a covered loss, it does not by itself provide coverage.
The Court held that “Option OL” did not kick in until there was a covered loss. Here, the structure was demolished because of the ordinance or law in question requiring demolition, and there was no covered loss to activate the additional coverages under “Option OL.” The actions required by ordinance itself (demolition) were the cause of the loss, and that is what was excluded under the policy.
Finally, the Court disagreed with the Reichert’s arguments that the law or ordinance exclusion should not apply because the “efficient cause” of their damage was not the governmental enforcement action, but the third party negligence of their architect and/or contractor. Unfortunately for the Reicherts, the law or ordinance exclusion contained language that the exclusion applies whether it is the sole cause of the loss or whether it contributes along with various other causes, including, in this case, contractor negligence or design negligence by the architect.
The Court of Appeal affirmed the judgment.
The case provides a good analysis of the law or ordinance exclusion and its applicability, and is a reminder that coverages such as the type sold in “Option OL,” do not by themselves trigger coverage, but provide for additional payments for otherwise covered losses. In this way, the exclusion and the provision compliment and delineate what will or will not be paid upon reconstruction following a property damage loss.
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