Attached to the policies was a Demolition and Cost of Construction (DICC) endorsement providing up to $5 million in coverage for specific losses resulting from the enforcement of laws and ordinances regulating the “construction or repair” of damaged property. It also covered any increase in the business interruption and extra expense loss arising out of the additional time required to comply with state law or ordinance.
When the named insured reported this loss to the insurers, maintaining that coverage applied under the DICC Endorsement because of the explosion, the insurers disagreed, asserting that it was not explosion that caused the loss but instead, corrosion. The insurers also maintained that the expenses incurred by the named insured to comply with the corrective action order (CAO) of the OPS were in doubt, because even if the CAO were considered to be a law or ordinance, coverage would only apply if the OPS was regulating the construction or repair of the damaged pipeline. Thus, the insurers were of the opinion that while the CAO may have regulated the use of the entire pipeline, it did not appear to have regulated the repair of the damaged portion of the pipeline.
Another reason given by the insurers for denying coverage was that for coverage to have applied under the DICC Endorsement, an insured peril must have caused the enforcement of law or ordinance. Here, however, they argued that the OPS acted out of concern for corrosion in the pipeline and corrosion was a peril expressly excluded by the terms of the insured’s policy. The Court of Appeals agreed with the insurer. In doing so, it stated that even if the accident had been caused by an insured peril (valve failure), by everyone’s admission the peril damaged at most only a small stretch of the pipeline, causing less damage than the deductible amount of $250,000.
With increased cost of construction claims, unless the criteria for coverage are proven — along with the amount of damages — insurers may deny coverage and find refuge in a sympathetic court to sustain their denial. Therefore, insureds desiring increased cost of construction coverage for direct physical loss or damage and the additional time element coverage required, must work carefully with their brokers to purchase the proper coverage.
There also must be an understanding that while the insured and broker can estimate or project how much coverage should be purchased to meet the code upgrade exposure, it is not the insured who will determine when or even if the increased cost of construction coverage has been triggered. That will likely be the role of some governmental body, most likely a state or local entity.
Once an order has been issued proclaiming that the property is