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But I Thought That Was Covered!

But I Thought That Was Covered!. 1. Does Your Company’s Property Policy Cover Losses Where Both Covered and Non-Covered Perils Combine to Cause a Catastrophic Loss?

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But I Thought That Was Covered!

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  1. But I Thought That Was Covered! 1. Does Your Company’s Property Policy Cover Losses Where Both Covered and Non-Covered Perils Combine to Cause a Catastrophic Loss? 2. Is There Coverage Where a Catastrophic Loss Causes the Government to Shut Down Your Company’s Operations and Requires Repairs and Upgrades?

  2. Perils That Are Typically Covered • Lightening strike • Fire • Explosion • Wind • Rain • Flooding

  3. Typical Excluded Perils • Ordinary wear and tear • Faulty workmanship • Mechanical breakdown • Inherent vice • Latent defect • Corrosion • Settling • Law and Ordinance

  4. Efficient Moving Cause Rule • Provides that cause “that sets all others in motion” is the proximate cause of the loss. • Applies even though other, excluded “causes” may follow it and operate more immediately in causing the disaster. • Koncilja v. Trinity Univ. Ins. Co. 528 P.2d 940 (Colo. App. 1974)

  5. Concurrent Causation • Some jurisdictions (including Texas) hold that no coverage exists where an excluded peril acted in any way to cause a loss if the causes cannot be separated. • Travelers Indem. Co. v. Citgo Petroleum Corp., 166 F. 3d 761 (5th Cir. 1999)

  6. Policy Language Controls • Some policies contain qualifying and enlarging words of causation, such as excluding loss or damage where an excluded peril “contributed to” or was “aggravated by” an excluded peril. • Redstone Corp. v. Fire Ins. Exch., 715 F.Supp. 300 (D. Colo. 1989)

  7. Considerations when evaluating your company’s property policy • How old are the equipment/facilities/premises to be covered? • Where is the covered property located? • Any inherent risk, such as exposure to the elements, wear and tear, etc. • Does the policy contain enlarging words of causation? • Does your policy contain an “ensuing loss” provision?

  8. Loss Caused by Enforcement of Laws or Ordinances • Usually loss caused by government actions and requirements are excluded perils. • Includes fire inspectors, OSHA regulators, EPA or other regulatory agency orders. • Can include additional business interruption and extra expense losses if facility is shut down by authorities after an accident, explosion, or fire.

  9. Demolition and Increased Cost of Construction Endorsement • Endorsement to add back coverage for losses excluded by Law and Ordinance exclusion. • Language of Endorsement: • In the event of loss or damage by an insured peril under this policy that causes the enforcement of any law ordinance regulating the construction or repair of damaged facilities … underwriters shall be liable for the increased cost of repair or reconstruction of the damaged and undamaged facility on the same or another site ….”

  10. Application of the DICC Endorsement – Two Positions -- DICC Endorsement covers costs and time element losses associated with bringing building or equipment into regulatory compliance where code violations were discovered as a direct result of the covered loss. -- Commonwealth Ins. Co. v. Benihana of Tokyo, Inc., 1997 WL 361617 (N.D. Tex. 1997). -- Davidson Hotel Co. v. St. Paul Fire & Marine Ins. Co., 136 F. Supp. 2d 901 (W. D. Tenn. 2001)

  11. Application of the DICC Endorsement – Two Positions • Second position – DICC Endorsement does not cover costs and time element losses associated with bringing building or equipment into regulatory compliance because this would encourage businesses to wait until there is a huge fire or explosion to try to get coverage to upgrade facilities to bring them into code compliance. • Chattanooga Bank Assoc. v. Fid. & Dep. Co. of Md. 301 F. Supp. 2d 774 (E.D. Tenn. 2004) • St. Paul Fire & Marine Ins. Co. v. Darlak Motor Inns, Inc., 1999 WL 33755848 (M.D. Pa. 1999)

  12. Are DICC Endorsements Enforceable in Colorado? • Colorado courts have not ruled on issue. • But Tenth Circuit, applying Colorado law, held in MarkWest Hydrocarbon, Inc. v. Liberty Mutal Ins. Co., 558 F.3d 1184 (10th Cir. 2009), that DICC Endorsement would not provide coverage for time-element losses where federal pipeline agency shut down a pipeline after a catastrophic loss because the Court felt that it gave policyholders an incentive to neglect their insured property and the policy would amount to a “maintenance contract”

  13. What Should You Do? • Consider risk of loss due to enforcement of laws and ordinances. • If there is a loss that brings in a governmental entity, document the reasons why it is involved and what specific actions are required by the relevant laws and ordinances. • Be clear with the insurance adjuster about what losses are caused by enforcement of laws and ordinances and the reasons why the policyholder must comply.

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