Law Or Ordinance Exclusion Bars Coverage

Reichert v. State Farm General Insurance Company
(Cal. Ct. of App., 4th Dist.), filed December 28, 2012 

KEY FACTS

Eric and Lizbeth Reichert attempted a remodel of their newly-purchased house.  Although the city approved the remodel plan, the work did not actually conform to the plans.

Before construction was finished, city building inspectors discovered the project did not conform to the plans or to floodplain regulations, and ordered the property to be demolished.  The Reicherts sued their architect and their contractor, and also presented a claim under their homeowners’ insurance policy issued by State Farm.

The Reicherts’ policy contained an exclusion, referred to as the law or ordinance exclusion.  It stated:  “We do not insure under any coverage for any loss which is caused by one or more of the items below, regardless of whether the event occurs suddenly or gradually, involves isolated or widespread damage, arises from natural or external forces, or occurs as a result of any combination of these:  a. Ordinance or Law, meaning enforcement of any ordinance or law regulating the construction, repair or demolition of a building or other structure.”

State Farm denied the Reicherts’ claim based on this exclusion.  The Reicherts sued.  The trial court granted State Farm’s motion for summary judgment.

HOLDING & REASONING

The Court of Appeal affirmed.  It found that demolishing the Reicherts’ house was the direct result of the enforcement of a law or ordinance.

In concluding that the loss was not covered, the court recognized that the intent of the law or ordinance exclusion is to exclude loss when it is the law or ordinance itself — as distinct from another peril, such as a fire — that is the cause of the loss.

The court rejected the Reicherts’ argument that the loss was actually caused by the negligence of their architect or contractor in failing to build according to the approved plans.  It noted:  “The Reicherts’ other argument against application of the law or ordinance exclusion is a riff on the topic of concurrent causation, which has bedeviled insurance law in California courts for over a hundred years since the 1906 San Francisco earthquake.”

The court explained:  “It is understandable the Reicherts should point to third-party negligence as the cause of their loss, since over the years, the focus of many first party property damage causation cases turned precisely on whether third party negligence — usually builder negligence — was itself a covered peril under an all-risk policy.”  However, the court reasoned, “[A]ctions can generate reactions, especially in insurance law.  Insurers responded to the case law holding third party negligence to be a covered peril by adding broad language to their policies excluding losses from third-party negligent conduct.”  The Reicherts’ policy included this language and, therefore, precluded coverage even on a third-party negligence theory.

ANALYSIS

The court did not address the trial court’s alternative holding — that there was no “accidental direct physical loss.”  That issue would have been interesting, especially since the construction conduct involved appeared purposeful, rather than accidental.