Federal District Court Rejects Insured's Claim for Costs to Correct Code Violations in Areas Not Affected by Insured Loss
January, 2005
by James M. Hoey and Kelly A. Jorgensen
The United States District Court for the Eastern District of Tennessee recently addressed the extent to which an all-risk policy provides coverage for costs incurred as a result of upgrading due to code violations. The court held that an insurer's liability is limited to costs associated with upgrading due to code violations only in the area that was directly affected by the insured loss. Chattanooga Bank Assoc. v. Fidelity and Deposit Co. of Maryland, 301 F.Supp.2d 774 (E.D. Tenn. 2004).
Facts
In Chattanooga Bank, plaintiff sought coverage for costs incurred following two separate fires on the second floor of the insured property. Following the fires, the building was inspected and found to be in violation of certain building codes. The discovery of these violations led a city court judge to issue an order requiring the building owner to immediately correct the violations.
Plaintiff moved for summary judgment seeking coverage for all code upgrades. Plaintiff argued that, pursuant to the policy, the insurer was liable for the costs incurred as a result of upgrading all of the code violations discovered during the inspection because these violations would not have been discovered but for the fire. The insurer asserted that it was not liable for the cost of upgrading code violations which were discovered in areas not affected by the fire. The insurer further argued that the discovery of the code violations in non-fire affected areas, even when the inspection would not have taken place in the absence of the fires, failed to create liability under the terms of the insurance contract.
Analysis
The Chattanooga Bank court first looked to the “Perils Insured Against” provision of the policy, which states that the insurer's liability is limited to “all risks of direct physical loss of or damage to property.” The court concluded “[t]his language acts to limit the liability of the insurer to only those cases where the loss or damage results from the peril.” The court then looked to the policy's “Demolition and Increased Cost of Construction” provision, which stated that “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. . .” (emphasis added) Relying on the interplay of these two provisions, the court rejected the insured's argument and held that even though the violations may have remained undiscovered but for the fire, the violations in question existed “independent of the fire,” and the fire cannot be said to have “caused” the enforcement of a building code. “The mere discovery of a code violation during an inspection after a fire is insufficient to create liability under the policy,” the court wrote. “The [insured] must show at trial that the fire, or the attempts to extinguish it, created the need to repair or reconstruct some portion of the insured property in a manner consistent with current building codes.”
Finally, the court also rejected plaintiff's argument that coverage could be found under the policy provision which provides coverage for “increased cost of repair or reconstruction of damaged and undamaged facility.” The court held that although there is liability as to portions of the undamaged facility, this liability is limited to repair or reconstruction: “Upgrades to undamaged portions of a building simply do not amount to repair or reconstruction.”
Learning Point:
Based on Chattanooga Bank, in order to recover costs incurred as a result of upgrading due to code violations, the insured must show that the code violation was in an area directly affected by the insured loss. The fact that the code violation was discovered merely as a result of the insured loss is insufficient. Costs incurred for upgrading due to code violations which were discovered in an area of the insured building not affected by the insured loss, should not be covered under an all-risk policy.
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