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

Heading: The Dam and the Insurance Policies

Text: Sierra is a publicly traded, investor-owned public utility engaged in the sale, distribution, transmission, and generation of electrical energy and natural gas. Sierra's public service territory includes most of Northern Nevada and parts of Eastern California. Sierra is both a California public utility and a Nevada public utility and its businesses are regulated by the California Public Utilities Commission and the Public Service Commission of Nevada. For many years prior to 1997, Sierra operated the Farad Dam, a hydroelectric dam on the Truckee River just west of the California-Nevada border. The Farad Dam consisted of nearly two miles of wooden flume, a forebay, a diversion dam, and a power generating facility with related structures, substation and transmission lines. On January 1, 1997, the Truckee River flooded, destroying the Farad Dam. Sierra insured the Farad Dam, along with the rest of its facilities, using two identical insurance policies, one issued by Hartford and one by Zurich (hereinafter, the Policy). The Farad Dam is covered property under the Policy, and flood is a covered peril. The policy insures against all risks of direct physical loss or damage to the property insured from perils not otherwise excluded, subject to the terms and conditions contained in the Policy. The Policy is divided into three sections. Section A contains coverage for property, Section B contains coverage for boilers and machinery, and Section C contains general provisions applicable to both. Section A also contains its own exclusions section for both excluded property and perils. This section does not contain an exclusion for increased cost of construction due to changes in building ordinances. Section C also includes a section containing perils exclusions. The particular exclusion at issue here regarding building ordinances or laws is contained in this section (hereinafter the Building Ordinance Exclusion), and states: IV. PERILS EXCLUDED This policy does not insure against loss or damage caused by or resulting from:    E. any increase in the loss due to any ordinance, law or regulation, rule or ruling restricting or affecting repair, alteration, use, operation, construction or installation; or by any injunction or process of any court, unless endorsed hereon. The Policy is a replacement cost policy covering the full cost of repair or replacement of covered property for covered losses subject to the limits and sublimits of the Policy. However, recovery for property not repaired or replaced is limited to the actual cash value (ACV) of the property. This limitation is described in the valuation provision within Section C, also at issue here, which states: W. Valuation Unless otherwise endorsed hereon, adjustment of the loss under this policy shall be:    6. on all other property covered by this policy the cost of repair or replacement (defined as the cost to repair or replace the damaged property without deduction for depreciation with materials of like kind, size, capacity and quality) subject to: a. liability under these terms shall not exceed the smallest of the following: (1) the cost to repair, rebuild or replace on the same site with material of like kind, size, capacity and quality, whichever is smallest; (2) the actual expenditure incurred in repairing, rebuilding or replacing on the same or another site but not to exceed size and operating capacity that existed at the time of loss, whichever is smallest. b. in the event of loss or damage to property which is not repaired, rebuilt or replaced within two years from the date of loss or damage, this company shall not be liable for more than the actual cash value (with proper deduction for depreciation) of the property destroyed; all to be computed as of the time and at the place of loss when with diligence and dispatch rebuilding, repairing or replacement of the damaged or destroyed property could be effected. ACV is not otherwise defined in the policy. The final provision at issue here is found in the Extensions of Coverage section of Section C. Specifically, the Policy provides: I. Demolition and Increased Cost of Construction 1. If at the time of any direct physical loss or damage insured against by this policy there is in force any ordinance regulating the construction, repair, replacement or use of buildings or structures, then this policy is extended to cover: a. the additional loss sustained in demolishing any undamaged portion of the buildings or structures necessitated by such law or ordinance; b. the cost incurred in actually rebuilding both the damaged and demolished portions of such buildings or structures in a manner to satisfy such law or ordinance. The Demolition and Increased Cost of Construction (DICC) coverage provided by this extension is limited to $10 million through a specific sublimit in the declarations pages of the policy.