One commercial property insurance coverage that is often overlooked is Ordinance or Law. It can also prove to be extremely important. Local building codes change; the Chicago city government “is currently in the middle of a multi-year effort to comprehensively update its construction requirements.” A property owner without enough Ordinance or Law coverage may face a serious financial shortfall in the event of a loss. That shortfall came back to bite a New Hampshire insurance agency.
The property was a small 95 year-old hotel, owned by an LLC whose sole member owned several other properties. He had worked with an independent agency since the early 2000s to obtain insurance coverage. According to the court opinion, by 2015 he had as many as 15 policies through the agency, with premiums approaching $50,000.
The LLC bought the hotel in 2006. It had the lobby and a convenience store on the first floor, offices and an apartment on the second floor, and guest rooms on floors three and four. At the time of purchase, the LLC bought “a $1.3 million replacement cost policy” on the building.
Over the years, what courts call a “special relationship” between the agency and insured began to develop. In 2011 and the two following years, the producer recommended increasing the building limit to $2 million. The insured finally did so in 2013; the agency obtained coverage through a Lloyd’s of London syndicate.
That same year, the producer recommended several other coverages to them, including Flood insurance on the building and Liquor Liability insurance for the convenience store, which sold alcoholic beverages. When the insured brought her his policies from other agencies to see if she could replace them, she advised him to stay with the incumbent carrier when she could not get him a lower premium. She also suggested that he ask the other agent about additional coverage.
The Lloyd’s syndicate non-renewed the policy in 2014, and the producer obtained a replacement from the non-admitted market. It was a “$2 million replacement cost policy” that provided $10,000 Ordinance or Law coverage. According to the opinion, “At no time did (the agency) recommend that (the insured) purchase additional law and ordinance coverage.”
Fire severely damaged the building in 2015. An engineering firm estimated that rebuilding it to meet code requirements would cost $2 million. The insured chose to demolish it. The insurer paid the $910,141 actual cash value of the building with no allowance for meeting code requirements. The insured then sued the agency for not advising him to buy additional Ordinance or Law coverage.
A jury heard the case in late 2018 and concluded that the agency was 75% liable and the insured 25%. The agency appealed to the New Hampshire Supreme Court, arguing that the trial court made several errors during the trial. The Supreme Court rejected those arguments, allowing the verdict to stand.
This case is unfortunate because the producer appears to have repeatedly sought to protect her client. She recommended purchasing multiple coverages; her failure was not recommending the one that became important. Worse, it appears she did not use a coverage checklist. The insured’s lawyer introduced one at trial and questioned the agency’s expert witness about its usefulness. Using one might have triggered her to raise the subject. Ordinance or Law would have covered the cost of demolishing the hotel, among other things.
The producer in this case appears to be a true insurance professional who simply overlooked a significant exposure. The lessons for other agents: Use coverage checklists, and discuss Ordinance or Law coverage with your commercial property clients.