NO. 91-213 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1992 

FARMERS UNION MUTUAL INSURANCE COMPANY, 

Plaintiff and Respondent, .. ., ' . .. .:< :,#P .. . ~ -.I 

-VS- .. .~ .~. ., ., '-..I: - 

GARY OAKLAND, individually and as Personal ., , ill; .:'i.;;wd -out?, 

Representative of the Estate of LORETTA OAKLAND, 

d/b/a Oakland Holding Company, 

Defendants and Counterclaimants and Appellants. 

APPEAL FROM: District Court of the Thirteenth Judicial District, 

In and for the County of Yellowstone, 

The Honorable Robert W. Holmstrom, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

James A. Poore, 111, Douglas A. Buxbaum and Patrick 

M. Sullivan; Poore, Roth and Robinson, P.C., 

Butte, Montana 

For Respondent: 

James L. Jones: Dorsey and Whitney, Billings, 

Montana 

Filed: 

Submitted on Briefs: October 10, 1991 

Decided : 

.,' 4 

Clerk 
Justice Terry N. Trieweiler delivered the opinion of the Court. 

On July 20, 1988, Farmers Union Mutual Insurance Company filed 

a declaratory judgment action against Gary and Loretta Oakland in 

the Thirteenth Judicial District Court in Yellowstone County. The 

District Court held that the insurance policy issued to the 

Oaklands by Farmers Union did not require Farmers Union to pay for 

additional costs related to the removal of materials containing 

asbestos during reconstruction of the insureds' property. Gary 

Oakland appeals. We reverse. 

The issue on appeal is whether the District Court erred in 

holding that a "code exclusion" clause in the insurance policy 

relieved Farmers Union of any obligation to pay additional costs 

forthe removal of debris fromthe insured's fire-damaged building, 

when the cost of removal was increased because of regulations 

related to the removal of materials that contain asbestos. 

The Oaklands purchased the Broadwater Center, a commercial 

property in Billings, on November 1, 1979. The Broadwater Center 

was an older building, and it contained asbestos pipe insulation 

and floor tile. On October 1, 1986, the Oaklands purchased a fire 

and casualty insurance policy for the Broadwater Center from 

Farmers Union. On January 4, 1988, a fire damaged the insured 

property. 

Gary Oakland immediately notified Farmers Union of the loss. 

Farmers Union retained an independent adjuster to handle the claim. 

Oakland then hired his own adjuster. The adjusters disagreed on 

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how to obtain reconstruction bids from contractors. In addition, 

they disagreed about whether the "code exclusion" clause in the 

insurance policy relieved Farmers Union of the obligation to pay 

the higher costs associated with removal and disposal of debris 

that contained asbestos. 

Consequently, in mid-February of 1988 Farmers Union decided to 

submit the matter to an appraiser selected by each party and an 

umpire selected by the appraisers. On May 15, 1988, the umpire 

determined that the total loss was worth $773,020. The umpire's 

award attributed $70,540 to the cost of asbestos removal. 

Almost immediately a dispute arose on the question of whether 

the appraisers had subtracted a deduction for depreciation on 

certain items as required by the insurance policy. Farmers Union 

therefore sought a declaratory judgment regarding the asbestos and 

depreciation issues. The Oaklands filed a counterclaim asserting 

that Farmers Union had acted in bad faith by unnecessarily 

prolonging the adjustment process. 

Both parties moved for summary judgment on the asbestos, 

depreciation, and bad faith issues. On January la, 1990, the 

District Court entered an order disposing of several pending 

motions. This order denied the pending summary judgment motions on 

the asbestos and depreciation issues. However, the court appended 

a memorandum to the order in which it stated: 

In connection with the asbestos issue, a question has 

been raised as to whether the Seventy Thousand Five 

Hundred Forty and No/100ths Dollars ($70,540.00) figure 
is the amount determined to be the costs of removing the 

asbestos material or is the amount in excess of what it 

would have cost to remove the material had it not 

contained asbestos. The Court has concluded [Farmers 

Union] is not required to pay any increased cost of 

repair or reconstruction by reason of the statutes and 

ordinances regulating asbestos and will permit a 

deduction from the total costs of repair or replacement 

of any such increased cost. 

Subsequently, the parties settled the depreciation and bad faith 

issues out of court, leaving only the asbestos issue for final 

decision. The District court then issued a final order and 

judgment declaring that Farmers Union was entitled to a deduction 

for the increased cost of asbestos removal. This appeal is 

therefore limited to the asbestos issue. 

According to Oakland, the materials at issue here are of two 

types: (1) materials containing asbestos that were directly damaged 

in the fire; and (2) undamaged materials containing asbestos that 

must be torn out in order to gain access to damaged materials. He 

does not seek compensation for the removal of any asbestos that it 

was not necessary to remove as part of the repair process. 

Farmers Union bases its position on the following clauses in 

the insurance policy: 

111. EXCLUSIONS 

Section I [the coverage provision] does not apply 

to loss or damage caused by or resulting from: 

1. Enforcement of any ordinance or law, 

either directlv or indirectly, reaulatinq 

the construction, reDair or demolition of 

buildinss or structures. [ Emphasis 

added. ] 

4 
and 

Business Pac Deluxe Policy Declarations 

... 

[Farmers Mutual] . . . does insure . . . [Gary and 

Loretta Oakland] . . . to the extent of the actual 

cash value of the property at the time of loss, but 

not exceeding the amount which it would cost to 

repair or replace the property with material of 

like kind and quality within a reasonable time 

after such loss without allowance for any increased 

cost of repair or reconstruction by reason of any 

ordinance or law requlatinq construction or reDair . . . . [Emphasis added.] 

We take judicial notice of the fact that asbestos removal is 

subject to regulations that increase the cost of removing and 

disposing of materials that contain asbestos, compared to the cost 

of removing and disposing of ordinary building materials. 

However, the first of these two provisions is clearly 

inapplicable under its own terms. The asbestos regulations, which 

are of course a valid exercise of the government's police power, 

did not llcause'l or llresult in" "loss or damage" to the insured 

property. It was the fire that caused the "loss or damage" to the 

insured property. Therefore, Farmers Union cannot rely upon this 

provision to support its claim that the cost of removing these 

materials is not covered by its policy. 

The Supreme Court of Idaho recently reached this same 

conclusion in Ganiett v. Transamerica hisuraiice Sewices (Idaho 1990) , 800 P. 2d 

656. The insurance policy at issue in Garnett purported to exclude 

coverage for "[l]oss occasioned directly or indirectly by 

5 
enforcement of any ordinance or law regulating the use, 

construction, repair, or demolition of buildings or structures.' 

Ganiett, 800 P.2d at 666. The court said that: 

As we read this provision, it does not limit 

Transamerica's obligation for the cost of repair or 

replacement of the building when a loss has occurred that 

is covered by the policy, but merely states that if the 

loss itself is caused by an ordinance or law, there is no 

coverage. For instance, if some safety improvement of a 

building to which no other loss had occurred were 

required by an ordinance or law, Transamerica would not 

be liable. However, 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. 

Gantett, 800 P.2d at 666. We agree with the Idaho decision. 

Farmers Union argues that even if the increased cost of 

asbestos removal is not a "loss or damage," it is certainly an 

"increased cost of repair or reconstruction by reason of an 

ordinance or law regulating construction or repair." Oakland, on 

the other hand, argues that the asbestos which must be removed is 

lldebris" and that the insurance policy affirmatively extends 

coverage for debris removal without qualification. 

We decline to adopt Farmers Union's interpretation of the 

clause in question. Interpretation of this clause is naturally 

controlled by its own context. The clause as a whole refers to the 

types of new materials with which the damaged materials must be 

revaired or revlaced. It is utterly silent on the question of 

debris removal. Elsewhere, the policy affirmatively grants 

coverage for debris removal without qualification. Thus, Farmers 

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Union apparently understood when it drafted the policy that repair 

and debris removal are separate costs, and if it intended to 

exclude debris removal costs related to code enforcement it could 

have done so. 

Furthermore, coverage exclusions are subject to a rule of 

narrow construction. In Dautel v. United Pacific Insurance Co. (Wash. Ct. 

App. 1987), 740 P.2d 894, 896, for example, the court noted that 

"[e]xclusions from coverage are contrary to the fundamental 

protective purpose of an insurance policy and will, therefore, be 

narrowly construed." The exclusions at issue in the case at bar 

only cover costs associated with "construction, repair, or 

demolition" and "repair or reconstructiont1 of the insured property. 

The insurance policy does not expressly exclude costs associated 

with the removal of debris that contains asbestos. The rule of 

narrow construction prevents us from expanding the plain language 

of these exclusions to certain types of debris, when elsewhere the 

policy affirmatively extends coverage for debris removal. 

We conclude that the policy as drafted affirmatively extends 

coverage for debris removal, that the asbestos in question is 

"debris, 'I and that the policy language purporting to limit coverage 

for new materials required by laws and ordinances is inapplicable. 

Thus, we hold that the District Court erred in ruling that Farmers 

Union had no contractual obligation to pay for asbestos removal and 

that it could deduct such costs from the umpire's award. 

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However, a fact issue remains regarding the amount of the 

costs that are recoverable. We limit our holding to the removal of 

fire-damaged asbestos and undamaged asbestos that must be removed 

in order to repair damaged materials. Farmers Union suggests that 

the $70,540 asbestos-removal figure used by the appraisers actually 

represents the cost of removing all asbestos in the buildinq. 

Oakland disputes this claim. Accordingly, we remand for a specific 

factual determination of how much it will cost to remove (1) firedamaged asbestos: and (2) undamaged asbestos that must be removed 

in order to access and repair fire-damaged materials. It is these 

amounts that are covered by the Farmers Union policy. 

Reversed and remanded. 

We concur: <4-- 

Chief Justice 

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January 28, 1992 

CERTIFICATE OF SERVICE 

I hereby certify that the following order was sent by United States mail, prepaid, to the 

following named: 

James A. Poore, 111; Douglas A. Buxbaum and Patrick M. Sullivan 

POORE, ROTH & ROBINSON, P. C. 

1341 Harrison Avenue 

Butte, MT 59701 

James L. Jones, Esq. 

DORSEY & WHITNEY 

1200 First Interstate Center 

Billings, MT 59101 

ED SMITH 

CLERK OF THE SUPREME COURT 

STATE OF MONTANA