Ordinance or Law Provision Requires Renovations to Undamaged Building, according to Fifth Circuit
The U.S. Fifth Circuit recently interpreted an “Ordinance or Law” provision of an insurance policy under Louisiana law, holding that the provision required an insurer to pay for renovations to buildings at a property site that were not damaged in a fire in one of the other buildings at the site.
Houston Specialty Insurance Company insured an 18-building, 124 unit condominium property in Lafayette, Louisiana. On December 26, 2012, a fire started in the HVAC duct work of one of the units, damaging two units in a single building. The remaining 17 buildings of the property escaped damage. However, the Lafayette Fire Department determined that the “layout of the duct work, the construction of the flex duct, and maintenance and housekeeping issues could have contributed to the fire.” The Fire Department conveyed its findings to the City’s “Chief Building Official,” advising him that the property presented a serious fire hazard because of these issues. Relying on the authority granted by the City’s Building Code, the Chief Building Official instructed the condominium association, the insured under the Houston Specialty policy, that the flex duct work in all the buildings needed to be redesigned and replaced. The association complied, and filed a claim with Houston Specialty, asserting that the policy’s “Ordinance or Law” provision covered the cost of the repairs. Houston Specialty paid the claim for repairs to the damaged building, but denied coverage for the cost to upgrade the duct work in the 17 undamaged buildings. Houston Specialty thereafter filed a declaratory judgment action to determine coverage.
The policy provided: “If a Covered Cause of Loss occurs to Covered Property [Houston Specialty] will pay for: (1) The loss to the undamaged portion of a covered building caused by the enforcement of any ordinance or law that: (a) Requires the demolition of parts of the same property not damaged by a Covered Cause of Loss; (b) Regulates the construction or repair of buildings …; and (c) Is in force at the time of loss.”
According to the Fifth Circuit’s January 6, 2016 opinion, Houston Specialty argued that the phrase “undamaged portion” applied only to the undamaged portion of buildings damaged by the fire. The Fifth Circuit easily dismissed this argument, finding that the plain language of the policy applied the phrase to all buildings. The court noted that the policy defined “building(s)” as “the building or other structures at the Insured Location,” meaning that the “singular term ‘building’” referred to all buildings at the property.
Houston Specialty further argued that the Ordinance or Law provision did not apply because the local ordinance failed to specify any “minimum requirements” for repair. Another section of the policy specified that Houston Specialty will pay for the increased cost to repair covered property, but limited to “the minimum requirements of such ordinance or law.” The Fifth Circuit stated that the limitation in this particular provision related only to instances involving the rebuilding or repairing the entire property, as opposed to the provision cited above, which related only to the undamaged portions of covered buildings. As a result, the “minimum requirements” limitation did not apply to the obligation set out in the above cited provision, which covers repairs to undamaged portions of buildings following a covered loss.
Based on the above analysis, the Fifth Circuit agreed with the district court, which had granted summary judgment, that the insured proved that the Ordinance or Law provision provided coverage for the repairs. However, the Fifth Circuit then considered whether a policy exclusion might apply. The court interpreted the following exclusion in the policy: “The Company will not pay for loss or damage caused by or resulting from any of the following: … Faulty, inadequate or defective; … (2) Design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction; … [or] Maintenance; of part or all of any property on or off an insured premises.” The Fifth Circuit noted that the City officials had complained about the design of the duct work as a basis for its order to upgrade the property. As a result, the Fifth Circuit determined that Houston Specialty had raised a genuine issue of material fact regarding the applicability of the exclusion. The Fifth Circuit reversed the summary judgment on this issue and remanded the case for further consideration of the exclusion.
Houston Specialty Insurance Co. v. Meadows West Condo Assoc., No. 15-30140 (5th Cir. 1/6/16).