Can My Business Recover Additional Income Loss If Code Upgrades Are Delaying the Time to Complete Repairs?

Iris Kuhn | Property Insurance Coverage Law Blog | May 31, 2019

Business Interruption coverage protects the potential earnings of the insured business while its operations are suspended as a result of damage caused by a covered peril. The period of restoration has a direct effect on the actual loss suffered. A typical definition in most ISO forms of the “period of restoration” is:

The period of time that begins at the time of loss and ends on the date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality or the date when business is resumed at a new permanent location.

Under this provision, if the business owner repaired, rebuilt, and resumed operations within the policy time limits, the period of restoration is calculated from the date of the loss by a covered peril until the “actual time” it took to rebuild and resume operations, subject to certain offsets.

However, compliance with building codes often extends the time to rebuild or restore suspended operations. Substantial delays may be expected when the building upgrades require the existing structure to be demolished before reconstruction can begin; or when rebuilding on the present site is prohibited and a new permanent location must be found. Depending on the nature and size of the business, this could translate into a significant loss of income. The question is then, does my policy provide coverage for the additional loss of earnings my business suffered as a result of the delay to comply with current building codes requirements?

Many business interruption coverage forms exclude or limit coverage for the delay arising out of the application of any ordinance or law that increases the period of restoration.

The standard ISO CP 00 30 Business Income (and Extra Expense) Coverage Form provides in pertinent part:1

‘Period of restoration’ does not include any increased period required due to the enforcement of any ordinance or law that:

(1) Regulates the construction, use or repair, or requires the tearing down of any property

The period of restoration definition specifically excludes coverage for any additional time required to rebuild as a result of law and ordinance requirements. ISO endorsement CP 15 31, the Ordinance or Law – Increased Period of Restoration may be utilized to overcome the effect of this exclusion. It states in pertinent part:2

A. If a Covered Cause of Loss occurs to property at the premises described in the Declarations, coverage is extended to include the amount of actual and necessary loss you sustain during the increased period of “suspension” of “operations” caused by or resulting from a requirement to comply with any ordinance or law that:
1. Regulates the construction or repair of any property;
2. Requires the tearing down of parts of any property not damaged by a Covered Cause of Loss; and
3. Is in force at the time of loss.

This endorsement provides coverage for the additional time needed to repair or reconstruct damaged property in accordance with any law or ordinance. As we approach the hurricane season, business owners are encouraged to speak with their insurance agents about their business needs. Among other things, they should discuss not only complete coverage for the increase cost of construction, but also coverage for the period of time required to adhere to the code upgrades.
1 ISO CP 00 30 10 12
2 ISO CP 15 31 10 12

Free Ride on RCV? Not So Fast!

Craig Bennion | Property Insurance Law Observer | May 29, 2019

Most property insurance policies condition the payment of replacement cost value (RCV) on the property first being replaced or repaired, and courts typically enforce that requirement.  Replacement cost is not owed until the insured completes repair or replacement.  Yet what property adjuster has never encountered an insured who attempts to claim reimbursement for items not damaged in the loss on the theory that such items are within the RCV estimate and are a part of the property’s “restoration”?

A recent Washington Court of Appeals decision illustrates.  In Mount Zion Lutheran Church v. Church Mutual Ins. Co., 2019 WL 2177893 Wash. App. (filed March 18, 2019; ordered published May 14, 2019), a fire damaged the interior of a church sanctuary.  Church Mutual obtained a replacement cost estimate of $729,106, and an ACV estimate of $593,361.  The insurance policy allowed the insured, Mount Zion Lutheran Church, to collect ACV regardless of whether it chose to repair or replace.  The insured had the option to rebuild, in which case it could then collect repair or replacement costs that exceeded ACV.  Church Mutual paid the ACV to Mount Zion.  It withheld the difference between RCV and ACV, approximately $135,744, pending the church’s completion of repairs.

The RCV estimate included over $196,000 to replace arched glulam beams in the church sanctuary and to replace the sanctuary roof.  The church’s pastor told Church Mutual’s adjuster that he preferred to repair, rather than replace, the glulam beams, because replacement would require removal of the roof.  Church Mutual hired an expert to assess the glulam beams.  The expert concluded that the beams did not need to be replaced.  Mount Zion obtained four contractor bids, all of which reflected the cost to repair, rather than replace, the glulam beams.  The bids all came in below the ACV amount already paid to Mount Zion.

Mount Zion then retained a public adjuster.  The public adjuster claimed that the glulam beams had to be replaced.  Although its expert and the four bidding contractors did not believe replacement of the beams was necessary, Church Mutual acquiesced to the public adjuster’s demand and allowed replacement of the beams.

In a routine post-construction inspection, Church Mutual’s adjuster discovered that the beams had been repaired, not replaced.  Mount Zion decided not to replace the beams because removing the roof would have significantly lengthened the timeline for construction.  However, it made a full RCV claim in which it reallocated the estimated cost to replace the glulam beams and roof to a set of “substitute expenditures.”  The substituted costs included the cost to replace a small kitchenette, damaged in the fire, with a redesigned full-size kitchen featuring upgraded cabinets, sink and faucets, and upgraded appliances.  It also upgraded hardware on the front entry doors, flooring and base trim in the sanctuary and foyer, wall and ceiling insulation, reframed the mezzanine, installed underground conduits for phone and internet cables, and made other improvements.

Church Mutual refused to pay the cost of replacing the glulam beams that Mount Zion did not replace.  It also refused to pay the “substitute expenditures” as being unnecessary under the policy.  Mount Zion sued for breach of contract, bad faith, and violation of Washington’s Insurance Fair Conduct Act.  The trial court denied Mount Zion’s motion for full replacement cost, ruling that it was not entitled to RCV for substituted costs that were not necessary to repair or replace lost or damaged property.

On appeal, the issue was whether Mount Zion was entitled to receive the full RCV calculated by the insurer, including the amount to replace the glulam beams and roof, where it did not replace those building components but spent further amounts on items unrelated to the beams or roof, many of which did not exist before the loss.

The insurance policy stated that Church Mutual would not pay on a replacement cost basis “[u]ntil the lost or damaged property is actually repaired or replaced; . . . .”  It also stated that the policy would not pay more on a replacement cost basis than the least of:

a.) The Limit of Insurance applicable to the lost or damaged property;

b.) The cost to replace “on the same premises” the lost or damaged property [of comparable material and quality]; or

c.) The amount you actually spend that is necessary to repair or replace the lost or damaged property.

The Court of Appeals first held that Church Mutual had no obligation to pay replacement cost of the glulam beams that Mount Zion chose not to replace.  The beams were repaired, but the insurer was not obligated to pay the higher replacement cost unless the beams were actually replaced.  Second, the court rejected Mount Zion’s argument that RCV applied to “Covered Property,” meaning the building as a whole.  The court noted that the policy applied ACV to Covered Property as one unit, but applied RCV to “lost or damaged property” within the Covered Property.  Church Mutual had the right to evaluate each item of the claim to determine if there was lost or damaged property, and to determine if the amount spent by the insured was necessary to repair or replace that lost or damaged property.

The Mount Zion decision offers several useful reminders about the settlement of property claims under policies with replacement cost provisions.

  1. RCV is available only if the damaged property is actually repaired or replaced. If the RCV of damaged property exceeds the cost to repair, only the repair cost is available if the insured opts to repair instead of replace.
  2. RCV is applied to specific lost or damaged property, not to the entire Covered Property as a whole unit. In other words, RCV does not represent a maximum amount available if only a portion of the property is actually repaired or replaced.  It is not a “budget” for “substitute expenditures.”
  3. A replacement cost policy does not reimburse an insured for the cost of improvements that did not exist prior to the loss event.

Anti-Concurrent Clause Enforced Where Loss Was Caused By Covered and Non-Covered Perils

Paul LaSalle | Property Insurance Coverage Law Blog | May 29, 2019

Last week, I had the pleasure of presenting at the Spring Meeting & Seminar of the Professional Public Adjusters Association of New Jersey (“PPAANJ”). One of the more thoroughly discussed topics during my presentation was a recent New Jersey federal court decision involving insurance policy language commonly known as an anti-concurrent/anti-sequential causation clause.1 The clause bars coverage when two identifiable causes-one covered and one not covered-contribute to a single loss.2

In that case, after Superstorm Sandy, an insured submitted a claim for sustained damage to its homeowner’s insurer. The insurer inspected the property and determined that high winds caused and contributed to damage to certain portions of the property. The insured then hired its own inspector to assess the damage and prepare an estimate of the costs of repairs. The insured’s inspector identified the same portions of the property as wind-damaged as the insurer’s inspector (though with more extensive and costly repairs). The insured also hired a causation expert, who concluded that first wind, then flooding, caused additional damage to the insured’s in-ground pool, boardwalk and electrical transformer.

The insurer sought to dismiss the insured’s damages claim as to to the in-ground pool, boardwalk and electrical transformer arguing that the anti-concurrent/anti-sequential causation clause in the insurance policy barred any recovery for damages arising from both wind (a covered peril) and flood (an excluded peril).

The court agreed with the insurer, noting that federal and state courts in New Jersey have applied and enforced similar anti-concurrent/anti-sequential causation provisions “to exclude all coverage for a loss occasioned by a flood, even when a flood acts concurrently or sequentially with a covered peril.” The policy’s anti-concurrent/anti-sequential clause barred recovery for the in-ground pool, boardwalk and electrical transformer because the insured’s own expert concluded that first wind, and then flooding, caused the damage to those items.

This case highlights that—depending on your jurisdiction—an anti-concurrent/anti-sequential causation clause within an insurance policy may apply to bar a claim even where a covered peril causes damage prior to an excluded peril.
1 Zero Barnegat Bay, LLC v. Lexington Ins. Co., 2019 WL 1242436 (D.N.J. March 18, 2019).
2 By way of example: “We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss.”

Flood Proof of Loss Filled Correctly? Do Not Lose Benefits By Failing to List Amount Claimed

Verne Pedro | Property Insurance Coverage Law Blog | May 28, 2019

It’s been almost seven years since Superstorm Sandy hit New Jersey and Sandy cases are still wending through New Jersey Courts. A recent Third Circuit Court of Appeals decision discusses the importance of a properly completed proof of loss when submitting a flood claim under a Standard Flood Insurance Policy (SFIP).1

In this case, the policyholder’s Jersey City property was damaged by flooding on October 29, 2012, during Superstorm Sandy. That property was covered by a SFIP issued by Selective.

On December 23, 2012, the policyholder submitted a proof of loss form that contained conflicting information concerning the property loss. Where the document provided a blank space for “Actual Cash Value Loss,” $1957.99 was listed. That same amount was listed as a deductible. Therefore, on the line for “Net Amount Claimed,” $0.00 is provided. The policyholder also included handwritten notations on the form, stating that it was “signed under protest” and demanded payment based on an insurance adjuster’s submission of both a report seeking $ 21,000. He also included an “advance payment request” for $30,000.

Submitted with the proof of loss form was a contractor’s repair estimate of $ 26,000, which included items in the basement and third floor ceiling. Selective denied the claim on December 24, 2012, noting that the “minimal damage to the building” totaled $334.06, which was less than the policy’s $5000 deductible. Selective also explained that damages to the lower level of the home were excluded under the policy’s basement limitation.

In October 2013, the policyholder filed a pro se complaint in the district court against Selective for breach of contract and alleging the insurer engaged in a fraudulent scheme to deny him benefits.

Selective moved to dismiss the state law claims. The district court granted the insurer’s motion but allowed the breach of contract claim to proceed. Selective filed a motion for summary judgment, which the district court granted on May 8, 2018, ruling that the policyholder was barred from recovery because he failed to submit an adequate proof of loss as required by the SFIP.

The district court also denied policyholder’s cross motion for summary judgment, observing that he attempted to raise claims outside the complaint and rejecting his claims for bad faith and sanctions against Selective. The policyholder appealed.

On appeal, the Third Circuit affirmed the district court’s decision. In its analysis, the court emphasized that strict adherence to the SFIP’s conditions precedent to payment is required. One requirement is timely submission of a “signed and sworn” proof of loss. The proof of loss must include, among other things, the amount of money the insured is claiming under the flood insurance policy, accompanied by detailed information about the property and damages.

The SFIP provides that within 60 days after the loss (or within any extension authorized by FEMA), the claimant must file a signed and sworn proof of loss that includes an inventory of damaged property showing the quantity, description, actual cash value, and amount of loss. The Third Circuit held that by claiming a net amount of $0.00 and otherwise failing to clearly indicate the amount sought, the proof of loss did not comply with the SFIP requirements.

Although the policyholder did not dispute the inadequacy of his proof of loss, he argued the proof of loss requirement was waived by a FEMA bulletin issued after Superstorm Sandy.2 The court disagreed, observing that the bulletin specifically stated it was not a blanket waiver of the proof of loss requirements. In that regard, the bulletin did not eliminate the proof of loss requirement; it simply allowed an insurance company’s initial payment to be based on the adjuster’s report, rather than a proof of loss. Moreover, a policyholder who believes he is entitled to recover more than the adjusted amount must still submit a proof of loss.

Regarding the fraudulent scheme arguments, the Third Circuit agreed they were preempted by the NFIP.

Finally, the Third Circuit declined to consider the policyholder’s argument that Selective cancelled his flood insurance policy in retaliation for filing the lawsuit because the allegations were not set forth in the complaint, and there were no exceptional circumstances that warrant consideration of that claim for the first time on appeal. Accordingly, the Third Circuit affirmed.

As the Uddoh case makes clear, a properly completed and supported proof of loss is critical because it is a condition precedent to coverage. It appears the policyholder in this case tried to go it alone, rather than hiring coverage counsel or a public adjuster, and made fatal mistakes from the beginning of the claim process. If you have questions about your insurance claim or submitting proofs of loss, there are several excellent archived posts by my colleagues discussing proofs of loss, or call us at (732) 704-4647 or e-mail me directly at with your questions.
1 Uddoh v. Selective Ins. Co. of Am., No. 18-2274, 2019 WL 2085954 (3d Cir. May 13, 2019).
2 See FEMA Bulletin W-12092a (Nov. 9, 2012), which attempted to speed up the process for obtaining an initial claim payment by granting a conditional and partial waiver of the proof of loss requirement. The bulletin stated that FEMA would “permit the insurer to adjust and pay a loss based on the evaluation of damage in the adjuster’s report instead of the signed Proof of Loss or insured-signed adjuster’s report.”

“Repair Work” Endorsements and Punch List Work

Jeremiah M. Welch | Saxe Doernberger & Vita | May 7, 2019

The recent white paper on Repair Work Endorsements by Jeremiah Welch, drew a storm of responses. Most were appreciative and included follow up questions, but there were those that lamented along the lines of: “How can that be? We’ve been doing it this way for years…”. For the skeptics, the best approach to test the premise of the paper (that most “repair work endorsements” are at best redundant with the PCO extension and at worst restrictive) is to try to formulate a scenario where coverage would be available under a “repair work endorsement” but not under a PCO extension.

Several folks asked about the impact of PCO extensions and repair work endorsements on “punch list” work. “Punch list” work presents a related but different problem. The first issue is understanding what is meant by the term “punch list”. You won’t find that term in an ISO CGL policy. You may find it defined in a construction contract and a Google search will yield several similar definitions. In general, our industry uses the term “punch list” to describe items identified toward the end of a project (often after the contractually defined point of “substantial completion”) which must be completed in order to fully comply with the contract requirements/scope. In short, “punch list” items are items necessary to complete the work.

The typical “repair work” endorsement does not cover “punch list” work. Most “repair work” endorsements define “repair work” to mean repair of completed work. The definitions do not include finishing uncompleted work. Similarly, an extension of coverage for the “products-completed operations hazard” will typically not cover finishing uncompleted work. In general, if there is ongoing “punch list” work, the best solution is to extend the policy period so that coverage for ongoing operations continues until the “punch list” work is finished.

(There is one potential exception where a PCO extension might cover uncompleted work (including punch list), which comes from the ISO definition of the PCO hazard. Where that particular part of the work has been put to its intended use it is deemed completed. Case law provides very little guidance about how narrowly or broadly “that particular part” is applied in this context. For example, if a floor has been occupied while final installation of a kitchen area is being completed, and an injury occurs in the kitchen area, I expect an insurer would argue that “that particular part” means the kitchen, and while the floor may have been put to its intended use generally, the kitchen, specifically, was not put to its intended use. I think the insurer would have a decent argument that coverage under the policy’s PCO extension was not available. In short, I would not recommend relying on a “put to its intended use” exception as a basis not to extend a policy period for uncompleted work.)

Now for a curveball. Sometimes “punch list” items, as defined above, are combined with pre-completion “repair work”. For example, during the completion of final finish work contractors scratch the floors. The floors have to be repaired before the owner accepts the project as finally complete. To date, no court case offers guidance on whether repair of the floors would be considered repair of completed work (and therefore covered under the PCO hazard) or repair of uncompleted work (and therefore not covered under the PCO hazard). I can see arguments in favor of either approach. If the work is not completed, neither a PCO extension nor a repair work endorsement will cover it because both cover only repair of completed work. In that case the solution would again be to ensure that the policy period is extended until the work is complete. But if the floor repair was deemed to be repair of completed work, it would be covered under the typical PCO extension. Again, we come to the result that the typical “repair work” endorsement adds nothing; we already had coverage under the PCO extension.

As such, it seems safe to conclude that “repair work endorsements” do not cover “punch list” work. Punch list work should be treated as “ongoing operations” and the policy period should be extended to accommodate it.