On April 14, 2011, the Appellate Division, Third Department, decided a claim by the City of Elmira for damage to an historic building ("the Armory") as a result of a wind storm which damaged the Armory's southern wall, causing a partial collapse. City of Elmira v. Selective Insurance Company of New York, 2011 N.Y.App.Div. Lexis 2927. An engineer's analysis determined that the collapse left the remaining portion of the wall unable to withstand gusting winds, and similar conditions existed in other areas of the Armory, rendering it unsafe and recommended that it be vacated until the exterior walls were rebuilt. The city's code enforcement officer found that the Armory was in violation of several sections of the State Building Code, and concluded that if repairs were not performed, the Armory should be demolished immediately. The city obtained an estimate to renovate the Armory of $7,350,000, and elected to have the Armory demolished based on a demolition bid for $1,022,000. It purchased a building on another site for $227,000 to serve the functions formerly provided by the Armory.
The city submitted a claim to its insurer under its all risk insurance policy. Selective Insurance Company acknowledged that the collapse of the south wall was covered, and paid the plaintiff the sum of $440,000 for the damage sustained in the windstorm, but refused to cover the cost of demolishing the undamaged portions of the Armory and purchasing a replacement building at a different location.
The city commenced an action for breach of contract, claiming coverage under the "Ordinance or Law" provision of an endorsement to its policy with Selective, which extended coverage to losses resulting from enforcement of "any ordinance or law."
Each of the parties moved for summary judgment. Supreme Court denied Selective's motion and partially granted plaintiff's motion, awarding plaintiff $500,000 for demolition costs and approximately $227,000 for the cost of replacing the Armory under the policy's Ordinance or Law provision.
The Ordinance or Law provision of plaintiff's policy provided, in relevant part:
(1) If a Covered Cause of Loss occurs to a covered Building property, we will pay:
(a) For Loss or damage caused by enforcement of any ordinance or law that:
(i) Requires the demolition of parts of the same property not damaged by a Covered Cause of Loss;
. . . [*3]
(c) The cost to demolish and clear the site of undamaged parts of the property caused by enforcement of the building, [**5] zoning or land use ordinance or law.
On appeal, the Appellate Division noted that the policy simply required that the Ordinance or Law provision be triggered by the occurrence of a "Covered Cause of Loss," and that the parties agreed that the windstorm damage to the south wall was a covered cause of loss under the policy. "Thus, plaintiff is entitled to coverage so long as the cost to demolish the Armory and clear the site of undamaged parts were caused by enforcement of the building, zoning or land use ordinance or law. In that regard, the record undisputedly reveals that, as a result of the Fire Marshal's finding that the Armory was in violation of several provisions of the Property Maintenance Code, he exercised his authority to enforce those code provisions by requiring that the portions of the Armory undamaged by the windstorm be either repaired or demolished."
Selective argued that the Ordinance or Law provisions should not be invoked because the covered cause of loss, the wind storm, did not cause the enforcement of the Property Maintenance Code requiring the Armory to be demolished. The Court noted that the Ordinance or Law provision did not contain such a requirement, and required only that a covered cause of loss occur. However, the Court denied summary judgment based on a lack of sufficient proof of damages.
Selective also contended that the city was not entitled to coverage for increased construction costs under the Ordinance or Law provision on the ground that the policy provides that the insurer would only pay for a loss resulting from "[the] increased cost to repair, rebuild or construct the property caused by enforcement of "¦ [an] ordinance or law." Here, the city purchased an existing structure to replace the Armory instead of repairing or rebuilding a replacement, and, therefore, Selective argued no coverage was afforded under the Ordinance or Law provision.
The Appellate Court found in favor of Selective on this issue, noting that the policy provision also provides that "increased construction costs" would not be paid "[u]ntil the property is actually repaired or replaced, at the same premises or elsewhere." The policy then went on to set forth limits on the amount defendant would pay "if the property is not repaired or replaced on the same premises." The Court concluded: "As coverage under the Ordinance or Law Provision is expressly limited to repaired, rebuilt or constructed property, Supreme Court erred in requiring defendant to cover the cost of plaintiff's purchase of an existing building to replace the Armory***."
This case is an example of the application of the Ordinance or Law coverage under a policy where the coverage is not directly related to the initial covered cause of loss. The Court strictly construed the policy provisions against the company.
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