The insureds, however, submitted proofs of loss totaling some $3 million. The insurer maintained that the difference was not covered because it largely represented "code upgrades." Litigation followed.
The key questions in this case of Southeast Real Estate Investment Corporation and Retail Management
Group, Inc. v. Nationwide Mutual Insurance Company, et al., U.S. Dist. Ct. S.D. MS (No.1:07cv1197-LTS-RHW 2008) involved areas of the insurance policy that purported to exclude (with a limited exception) costs and expenses associated with ordinance and law provisions — also commonly referred to as "code upgrade" coverage.
A careful reading of the policy and its endorsements by the court revealed no provision for increased cost of construction, with the exception of some limited coverage subject to a maximum of $10,000. In looking at the Building and Personal Property Coverage Form, the court said that the cost of repair or replacement did not include the increased cost attributable to the enforcement of any ordinance or law regulating the construction, use or repair of any property. Likewise, the court said, the Causes of Loss Special Form also precluded the payment for loss or damage caused directly or indirectly by any increased costs incurred to comply with an ordinance or law in the course of construction, repair, renovation, remodeling or demolition of property, or removal of its debris, following a physical loss to that property.
From the court's perspective, there was no way the insureds were going to convince it that the property policy covered any more than the limited, additional amount of $10,000. This amount, incidentally, went to pay architects' fees — undoubtedly for less than the insureds actually needed.
Ways the Coverage is Provided
Increased cost of construction coverage varies by insurer in both the provisions utilized and the available limits. Upon comparison, many of the basic coverage provisions are similar and provide the following: