...failsafe formula can be devised. Considering the time and expense it can take to examine each property to determine the exposure and make estimates, along with the extra cost of the coverage, many insurance buyers will simply hope for the best.
Because insureds often do not get the sympathy of the courts, litigating the issue of whether and to what extent coverage for code upgrade applies is a gamble. However, when they stand to lose large sums from their claims being denied, insureds will risk time and expense in efforts to convince the courts that the insurers are wrong.
In the case of Chattanooga Bank Associates and Suntrust Bank v. Fidelity and Deposit Company of Maryland, 301 F.Supp.2d 774 (U.S.Dist. Ct. E.D. TN 2004), the insureds attempted to recoup code upgrade coverage even for undamaged areas that were in violation of code. While this approach can work depending on the coverage form, in this case the attempt failed.
The premises in question was damaged by fire on two occasions in less than a month. After the fire, the building was inspected and found to be in violation of certain building codes. The violations involved damaged and non-code electrical wiring and fixtures, an inoperable and non-code fire alarm system, a non-code elevator emergency system, damaged and non-code stairway lighting and emergency signage, defective standpipe valves and other non-code matters. It was unclear which, if any, of the cited violations incurred in areas impacted by the fire.
The insureds argued that the insurer was nonetheless liable for all code violations discovered during the inspections, regardless of their relationship to the fire. The insurer argued, however, that the discovery of code violations in areas not affected by the fire did not make it liable. The court agreed. In its explanation, the court first turned to the provision dealing with the perils insured against. Since the policy provided coverage for all risks of direct physical loss or damage to property unless a specific exclusion applied, the court concluded that this language acted to limit the insurer’s liability to only those areas where the loss or damage resulted from a peril not otherwise excluded; in this case, specifically the peril of fire.
The demolition and increased cost of construction coverage provision was the next item referred to by the court. Of significance here, said the court, was the precondition phrase that read:
In the event of loss or damage under this coverage part that causes the enforcement of any law or ordinance regulating the construction or repair of damaged facilities, the company shall not be liable for: