Insurers are generally presented with claims seeking reimbursement for the increased cost of repair or cost of code upgrades. However, sophisticated insureds often attempt to obtain coverage for the “increased cost of repair” to non-damaged property, arguing that “concurrent causation” principles apply. The “concurrent causation” doctrine creates coverage in a situation where a non-excluded cause is a substantial factor in producing the damage or inj
Insurers are generally presented with claims seeking reimbursement for the increased cost of repair or cost of code upgrades. However, sophisticated insureds often attempt to obtain coverage for the “increased cost of repair” to non-damaged property, arguing that “concurrent causation” principles apply. The “concurrent causation” doctrine creates coverage in a situation where a non-excluded cause is a substantial factor in producing the damage or injury, even though an excluded cause may have contributed in some form to the ultimate result and, standing alone, would have properly invoked an exclusion contained in the policy. See e.g. Davidson Hotel Co. v. St. Paul Fire & Marine Ins. Co., 136 F. Supp. 2d 901 (W.D. Tenn. 2001).
In some jurisdictions, this argument has been accepted by the Courts. For example, the United States District Court for the Northern District of Texas examined the issue in Commonwealth Ins. Co. v. Benihana of Tokyo, Inc., 1997 U.S. Dist. LEXIS 1748, *1 (N.D. Tex. June 19, 1997). In Benihana, the insured’s restaurant sustained a fire, causing direct damage to four ventilation hoods and resulting in the discovery of code violations to an additional sixteen ventilation hoods located in areas of the restaurant not damaged by the fire. Id. at *1.
The court interpreted the following policy language:
Subject to the terms, conditions, and limitations of this Policy including endorsements thereon, in the event of loss or damage by a peril insured under this Policy that causes the enforcement of any law or ordinance regulating the construction or repair of damaged facilities, this Company shall be liable for:
* * * (c) the increased cost of repair or reconstruction of the damaged and undamaged portion of the facility on the same or another site but limited to the minimum requirements of such law or ordinance regulating the repair or reconstruction of the damaged property on the same site . . . .
Ultimately, the court held that the inspection could be considered the "cause" of the enforcement and allowed coverage for the cost to upgrade the non-damaged property.
The court reasoned:
. . .while it is true that the fire department may have conducted an inspection at any time, the fact is that the inspection was triggered by the occurrence of the fire. Moreover, the fact that the code may have been applicable before the fire is irrelevant since the bylaw does not specify that the regulation being enforced be newly applicable or that the fire hazard not have previously existed. Instead, the language simply requires the enforcement of any law or ordinance, regardless of whether the hazard or violation was preexisting.
Two years later, the United States District Court for the Middle District of Pennsylvania examined similar language and reached the opposite conclusion. See St. Paul Fire and Marine Ins. Co. v. Darlak Motor Inns, Inc., 1999 U.S. Dist. LEXIS 23283, *1 (M.D. Pa. Mar. 9, 1999) aff’d 205 F.3d 1330 (3d Cir. 1999). In Darlak, the court considered whether code upgrades for non-damaged elevators, emergency lighting, smoke detectors, electrical systems, air handlers, panic devices, and emergency generators were covered as increased cost of repair even though the fire damage was limited to six hotel rooms.
The policy stated:
In the event of loss or damage under this policy that causes the enforcement of any law or ordinance in effect at the time of the covered loss, regulating construction, repair or use of property, this company shall be liable for:
* * * (3) increased cost of repair or reconstruction of the damaged and undamaged property on the same or another site intended for the same occupancy, and limited to the costs that would have [been] incurred in order to comply with the minimum requirements of such law or ordinance regulating the repair or reconstruction of the damaged property on the same site.
The court held that the policy only granted "coverage for 'direct physical loss or damage to property insured'" and, therefore, did not cover non-damaged property. The court explained:
While it is true that these violations may have remained undiscovered if not for the fire, the fire did not cause the enforcement of the code provisions because the violations found by . . . [the inspector] existed independent of the fire damage. Stated differently, the fire did not cause the conditions that rendered the Darlak Motor Inn to be out of compliance with the code.
Id.
This issue was first addressed in Tennessee in the case of Davidson Hotel Co. v. St. Paul Fire & Marine Ins. Co., 136 F. Supp.2d 901 (W.D. Tenn. 2001). In Davidson, the court interpreted the same policy language following a sprinkler system malfunction, causing water damage inside the hotel and resulted in the discovery of code violations. Specifically, the policy stated:
J. Demolition and Increased Cost of Construction
In the event of loss or damage under this policy that causes the enforcement of any law or ordinance in effect at the time of covered loss, regulating the construction, repair or use of property, this Company [St. Paul] shall be liable for:
* * * 3. Increased cost of repair or reconstruction of the damaged and undamaged property on the same or another site intended for the same occupancy, and limited to the costs that would have incurred in order to comply with the minimum requirements of such law or ordinance regulating the repair or reconstruction of the damaged property on the same site . . . .
Id. at 910-911. (emphasis omitted).
The court held that the insurer’s liability extended to the cost of upgrading code violations discovered during the inspection following the loss because "the inspection occurred only [as a result of] of the incident giving rise to liability”. Id. at 911. The court dismissed the insurer’s argument that finding liability would be contrary to public policy, holding that “it is not realistic to think that an insured would [ignore] compliance with building and fire codes to wait for the occurrence of an insured event, particularly in light of the potential tort liability for one who makes an economic decision that jeopardizes safety.” Id.
Despite this legal landscape, Drew Eckl & Farnham later represented Fidelity and Deposit Company of Maryland (“FDCM”) challenging the position adopted by Tennessee in Davidson. See Chattanooga Bank Associates and SunTrust Bank v. Fidelity and Deposit Company of Maryland, 301 F. Supp.2d 774 (E.D. Tenn. 2004). In Chattanooga Bank Associates, the insured suffered two fires on the second floor of its building. After the fires, the building was inspected and found to be in violation of certain building codes and was ordered to correct the violations. Chattanooga Bank Associates sought coverage for the increased cost of repair to correct the code violations, even though the code requirements involved undamaged property. The claim was denied.
Thereafter, Chattanooga Bank Associates sued FDCM, alleging that FDCM was liable for all code violations discovered during the inspections, regardless of their relationship to the fires, citing the same policy provisions for increased cost of repair. Despite the earlier Davidson decision, Drew Eckl & Farnham persuaded the Court that FDCM was not liable.
The Court held:
The Court does not read the contract as intending such coverage, nor does this Court believe that it would be consistent with the public policy concern for public safety to permit a building owner to insure against the discovery of existing code violations.
In so holding, the Court expressly rejected the Davidson argument that the inspection was triggered by the fire and, therefore, was the cause of the enforcement of the building codes. Instead, the Court recognized that “although the violations might have remained undiscovered if not 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, which was at all times subject to enforcement."
Unfortunately, Tennessee’s position has yet to be adopted by all jurisdictions. When considering such coverage, it is wise to confer with counsel as to the current position of the relevant jurisdiction and proceed accordingly.