Difference in Conditions Coverage: What Is It and Who Needs It?

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...expenses related to the undamaged portion of the building, or the increased cost of bringing the newly constructed building up to code.

The exclusion also affects business income and extra expense coverage if the DIC policy includes that coverage. The income coverage would pay for lost income incurred only for the time required to rebuild, but not necessarily for the time required to demolish the undamaged portion of the building.

Insureds should seriously consider adding ordinance or law coverage to the DIC policy and make sure that coverage applies for direct damage as well as to income loss.

Subrogation

Subrogation provisions can vary considerably in DIC policies. Some forms give the insured the right to waive subrogation against a party that may have caused or contributed to a loss, while others do not. Some provisions are more restrictive than others.

Ordinarily, since both floods and earthquakes are acts of nature, there will not be anyone to subrogate against. However, particularly with regard to floods, it’s conceivable that a third party may have contributed to or did something to cause a flood. An example where subrogation might have been possible is the case of Safeco Ins. Co. of America v. Guyton, 692 F. 2d 551 (9th Cir. Cal. 1982), where a loss from flooding was caused by a negligently constructed flood control wall.

Subrogation provisions in a DIC policy should be reviewed since DIC insurers are generally willing to amend the policy, for example, to include the insured’s right to waive recovery against another party if such a provision is not already in the policy.

Court Decisions Involving DIC Coverage

Court decisions involving DIC coverage often center around disputes between agents, brokers and insureds concerning whether the proper coverage was purchased. The case of Zinsel Company, Inc. v. J. Everett Eaves, Inc., 749 So. 2d 798 (Ct. of App. of Louisiana 1999) 7 involved a dispute between a flood insurance insured and its agent. After doing business for many years, the agency relationship was terminated at renewal, except for the flood policy which had a different expiration date. The insured carried a “Write Your Own” flood policy. When flood insurance became available in the 1970s, the maximum limits available to business firms were $100,000 for buildings and $100,000 for contents. In the 1980s, Congress raised these limits to $200,000 for buildings and $200,000 for contents, which were purchased by the insured. These were the limits of the flood policy at the time the insured moved its other business from the agent. In late 1994, Congress again raised the limits to $500,000 each for building and contents. In response to this change, the insurer mailed a notice to all of its insureds who were carrying the lower limits notifying them of the increased limits now available. The same notice was sent to its agents. The agent relied on the insurer’s letter to the insured as being sufficient notice of the increased limits, and planned to discuss the subject of increased limits with the insured at renewal.

Unfortunately, the insured sustained a flood loss, which would...

“Business interruption coverage must be specifically added to the DIC policy if that coverage is considered necessary or desired.”


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