Opinion ID: 620294
Heading Depth: 3
Heading Rank: 1

Heading: Building Ordinance Exclusion

Text: The California Supreme Court has not addressed the question whether a building ordinance or law exclusion contained in a section of perils exclusions, similar to the one at issue here, is effective to limit the coverage for an insured structure by excluding costs for complying with intervening building code changes. Jurisdictions that have addressed this question have reached differing conclusions. [3] The California Courts of Appeal appear to be split on the issue as well. The most recent decision, Fire Insurance Exchange v. Superior Court (Altman), 116 Cal.App.4th 446, 10 Cal.Rptr.3d 617, 631 (2004) ( Fire Insurance Exchange ), found that a similar exclusion does not exclude costs to comply with building codes when the loss itself is caused by a covered peril. Earlier decisions, most notably Bischel v. Fire Insurance Exchange, 1 Cal.App.4th 1168, 2 Cal. Rptr.2d 575, 581 (1991), found that the exclusion did preclude coverage. The California Supreme Court denied review in both cases. In Fire Insurance Exchange, the court emphasized that the exclusion for losses caused by enforcement of building codes or ordinances was in a section containing only perils exclusions. Moreover, there was no limiting language in the valuation section of the policy or insuring clause, but by comparison there is such limiting language in the standard form policy in California Insurance Code Section 2071. [4] Fire Ins. Exch., 10 Cal.Rptr.3d at 632. The court stated, [t]he exclusion's location in a long list of excluded perils, combined with the words `caused directly or indirectly by,' indicate that its intended function is to exclude a peril, not to place a limit on replacement costs. Id. at 634 (citing Bank of the West v. Super. Ct., 2 Cal.4th 1254, 1265, 10 Cal.Rptr.2d 538, 833 P.2d 545 (1992)). In addition, the court noted that increased costs are not a peril, [and] nowhere does the exclusion use the term, `increased costs.' It excludes loss caused by or consisting of enforcement, which is not a cost, and which appears in a list of perils. Id. at 633 (emphasis original). California courts hold that direct physical loss `contemplates an actual change in insured property then in a satisfactory state, occasioned by accident or other fortuitous event directly upon the property causing it to become unsatisfactory for future use or requiring that repairs be made to make it so.' MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co., 187 Cal.App.4th 766, 115 Cal.Rptr.3d 27, 37 (2010) (quoting AFLAC, Inc. v. Chubb & Sons, Inc. 260 Ga.App. 306, 581 S.E.2d 317, 319 (2003)). Thus, loss and costs are distinct concepts. Other California cases have reviewed similar exclusions and reached different conclusions. Bischel relied on two previous cases dealing with actual cash value policies, Breshears v. Ind. Lumbermens Mut. Ins. Co. 256 Cal.App.2d 245, 63 Cal. Rptr. 879 (1967) and McCorkle v. State Farm Ins. Co., 221 Cal.App.3d 610, 270 Cal.Rptr. 492 (1990), and held that the standard form policy, which governed those two cases, excluded costs from building code updates. Bischel, 2 Cal.Rptr.2d at 580. Bischel relied on the fact that California Insurance Code Section 2071 authorizes use of an ordinance or law exclusion[to] find ordinary rules of construction against the insurer are not applicable with respect to this provision. Id. Since the policy at issue in Fire Insurance Exchange was a replacement cost policy, that court concluded that Bischel, Breshears, and McCorkle did not dictate that the increased costs should be excluded. 10 Cal.Rptr.3d at 631. Fire Insurance Exchange further criticized the Bischel court for not discussing the effect of the difference between actual cash value policies and replacement cost policies since Bischel did involve a replacement cost policy. Id. at 631-32. Fire Insurance Exchange conclude[d] that Bischel is an anomaly, and [noted] that its reasoning has not been followed in any published California judicial opinion. Id. at 632. While Bischel has not been followed since Fire Insurance Exchange, it has not been overturned. Thus, we are unable to predict how the California Supreme Court would decide the issue.
The Insurers contend that any coverage for increased costs due to intervening changes in building codes or ordinances is limited to that offered in the Demolition and Increased Cost of Construction coverage extension. However, even though this coverage extension would cover the extra expense incurred as a result of complying with intervening changes in building ordinances, it does not limit coverage otherwise available under the Policy. This coverage extension gives additional coverage not available elsewhere under the Policy for demolishing undamaged portions of the building or structure if required by new building ordinances. Thus, this extension of coverage cannot limit liability under the Policy.
If the Policy excludes increased costs due to building ordinances, the Building Ordinance Exclusion is the only potential source of that limitation. The California Supreme Court has not indicated whether such an exclusion, which is located in a list of perils exclusions and purports to exclude increases in the loss rather than the costs to repair or replace, is effective to limit an insurer's liability. The California Courts of Appeal have reached conflicting results on the issue; therefore we respectfully request the California Supreme Court decide this question of California law.