Law & Ordinance Exclusions and Coverage and Constructive Total Loss—A Florida Perspective

Law and Ordinance Coverage is important for policyholders incurring a significant loss and faced with rebuilding to newer building codes and local ordinances, which generally increase the cost of construction. Florida has made significant changes to its building codes since Hurricane Andrew struck in 1992. Buildings are safer and stronger today than a few decades ago. But, the cost to make them safer and stronger is not inexpensive.

In 2006, the Florida Office of Insurance Regulation prepared a study of the law and ordinance coverage, noting the following:

Building codes became widespread in the United States during the last century, although the earliest known building regulation appeared in the Code of Hammurabi over 4000 years ago. That building code regulation stated that if an architect built a house negligently or improperly and the house fell down and killed the owner’s son, then the architect’s son was to be put to death.

The first statewide building code was mandated by the Florida Legislature in the early 1970s and required all cities and counties to adopt and enforce one of the four state recognized model codes. In the late 1990s, the State of Florida established the Florida Building Commission, which developed a single, statewide building code to be administered and enforced by local jurisdictions and certain state agencies. Under certain conditions, these governmental entities may amend the building code and make the requirements more stringent. One reason for the development of the new Florida Building Code, which went into effect on March 1, 2002, was to strengthen and make more uniform building code requirements for windstorm-related exposures. In general, the new building code has stronger windstorm-related requirements for buildings closer to the coast.

Building codes typically set forth minimum requirements for the quality and durability of construction materials and techniques to be both “practical and adequate for protecting life, safety, and welfare of the public” (See Alachua County Code). The codes cover most aspects of building construction, such as fire and structural safety and electrical, plumbing and mechanical systems. Because building codes change from time to time and tend to reflect higher standards and improved technology, an important feature of building codes is that they apply only to new construction and are not applied retroactively to existing buildings.

They do apply, however, to previously existing buildings that are substantially damaged or remodeled. For example, Section 3401.7.2.6 of the Florida Building Code states:

When repairs and alterations amounting to more than 50% of the value of the existing building are made during any 12-month period, the building or structure shall be made to conform to the requirements for a new building or structure or be entirely demolished.

This provision, which is commonly found in this or a similar form in building codes elsewhere, has important property insurance implications (See Florida Association of Insurance Agents).

The traditional coverage offered within a majority of property insurance policies, including the homeowner’s insurance policy, is intended to rebuild or repair a damaged structure and return it to the state in which it existed prior to the loss caused by a covered peril. This coverage is not intended to pay all of the costs to update the structure so that it complies with current building and zoning laws, codes and ordinances. This is particularly an issue when a structure is substantially, but not completely, destroyed and when the undamaged portion of the structure requires extensive renovation to comply with current building and zoning laws, codes and ordinances.

One claims practice is for insurance adjusters to hire insurance industry forensic engineers, usually from HAAG, JS Held, Rimkus or Thorton Tomasetti to challenge whether a structure has to be built to the new code. While the Underwriting Department supports newer and stronger building codes, the claims departments are charged with reducing payments if policyholders buy the law and ordinance coverage to pay for it.

Numerous Florida courts have concluded that policy “ordinance or law” exclusions relate to partial losses and do not apply to a finding of whether or not a loss constitutes a constructive total loss under circumstances where an ordinance prevents repair.¹

In Netherlands Insurance Company v. Fowler, the insurer contended that the total destruction of the building was caused by operation of city building codes rather than the fire, which it argued was excluded by the contract exclusion for losses occasioned by ordinances regulating construction. The court upheld the lower court’s determination of a “total loss by fire” where the building was severely damaged by fire and the city refused to allow its repair and ordered demolition.²

In Reliance Insurance Company v. Harris,³ the insurer contended a genuine issue of material fact existed as to whether Harris did or should have mitigated his damages by repairing the building. However, the court found that the policy only requires the insured to protect the property from further damage, make temporary repairs, and to keep accurate records of repairs. In Harris, “the real contention was over the option granted Reliance to repair or replace the lost or damaged property. While squabbling over that option, the building was demolished.” The case suggests that carriers should do the rebuilding themselves or something other than allege the building official’s determination was wrong.

Citizens’ Insurance Company v. Barnes,⁴ recognized the rule laid down in other jurisdictions that parties are presumed to have contracted with knowledge of statutory limitations and requirements, which become a part of the contract. The court held that where a building inspector found a building was damaged to more than fifty percent of its value, an ordinance that prohibited repairs of such damage rendered the building a total loss. The Barnes court also addressed the conclusive nature, in a subsequent action for insurance proceeds, of the government inspector’s determination that the building was damaged to the extent of fifty percent of its value, thereby requiring demolition.

As to the authority of the city to enter such an order, the Barnes court stated “that such orders are valid and binding police regulations is so universally held to be true that it is needless to cite authorities in support of this finding.” The Barnes court held, “the decision of those officers should be disturbed only upon very clear grounds.” Such orders are recognized as conclusive in a subsequent action on an insurance policy.⁵

Thought For The Day

A world which sees art and engineering as divided is not seeing the world as a whole.
—Professor Sir Edmund Happold
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¹ City of New York Fire Ins. Co. v. Chapman, 76 F.2d 76 (7th Cir. 1935); Rutherford v. Royal Ins. Co., 12 F.2d 880 (4th Cir. 1926); Netherlands Ins. Co. v. Fowler, 181 So. 2d 692 (Fla. 2d DCA 1966); Reliance Ins. Co. v. Harris, 503 So. 2d 1321 (Fla. 1st DCA 1987), rev. denied, 513 So. 2d 1063 (Fla. 1987); Regency Baptist Temple v. Ins. Co. of North America, 352 So. 2d 1242 (Fla. 1st DCA 1977).
² Netherlands Ins. Co. v. Fowler, 181 So. 2d 692 (Fla. 2d DCA 1966). See also Regency Baptist Temple v. Ins. Co. of North America, 352 So. 2d 1242, 1244 (Fla. 3d DCA 1977).
³ Reliance Ins. Co. v. Harris, 503 So. 2d 1321 (Fla. 1st DCA 1987).
⁴ Citizens’ Ins. Co. v. Barnes, 98 Fla. 933, 124 So. 722 (Fla. 1929).
⁵ See Algernon Blair Group v. USF&G, 821 F.2d 597, 602 (11th Cir. 1987)(Although the insurer could have contested the city’s findings, having failed to do so, the insurer may not later contest the findings and avoid coverage in a subsequent action brought by the policyholder seeking to enforce coverage.).