(Article from Insurance Law Alert, June 2025)
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Holding
A Wisconsin appellate court ruled that the costs incurred in complying with a raze order of a building following a fire were excluded from coverage under a business owners policy. Distinguished Multiplying Buildings (D.M.B.), LLC v. Germantown Mutual Insurance Co., 2025 WI App. LEXIS 346 (Ct. App. Wisc. Apr. 22, 2025).
Background
A fire caused extensive damage to part of a building owned by DMB. Following an inspection, a municipal agency deemed the building unsafe and unreasonable to repair, and therefore issued a raze order directing DMB to “raze and remove” the building or parts thereof.
DMB filed a claim with Germantown, whose policy covered “direct physical loss” to property unless otherwise excluded. DMB claimed that the fire, coupled with the raze order, constituted a “constructive total loss,” requiring Germantown to pay the actual cash value to repair or replace the building. In response, Germantown acknowledged coverage for portions of the building and personal property destroyed by the fire but argued that an Ordinance or Law Exclusion barred coverage for the portions of the building ordered razed but not damaged by the fire.
DMB sued Germantown, alleging breach of contract and bad faith, among other claims. A trial court ruled that the exclusion unambiguously applied, but denied DMB’s summary judgment motion, finding that issues of fact existed as to which costs were incurred as a result of the fire and which stemmed from the raze order. Thereafter, an appraisal panel issued a cost analysis, and the court issued a final order consistent with the panel’s findings. The appellate court affirmed.
Decision
The Ordinance or Law Exclusion states that it will not cover “loss or damage caused directly or indirectly by” an “Ordinance or Law,” including “compliance with” any such ordinance or law that leads to “the tearing down of any property.” The exclusion also applies if the “loss results from” an increase in “costs incurred to comply with an ordinance or law in the course of construction, repair, renovation, remodeling or demolition of a property or removal of its debris, following a physical loss to that property.”
The appellate court ruled that the raze order (and costs resulting therefrom) fell squarely within the policy’s Ordinance or Law Exclusion. In so ruling, the court rejected DMB’s assertion that the municipal raze order, issued pursuant to state statutory law, was “merely a conclusion” that the structure was not repairable due to fire damage, and thus the sole loss at issue was the fire. DMB argued that the raze order was not a “loss in and of itself,” but rather a recognition that the building should not be repaired due to extensive fire-related damage.
Concluding that this argument was without merit, the court held that the fire and subsequent raze order were separate losses for insurance coverage purposes. Therefore, even if the raze order rendered the building a total loss under the policy, the Ordinance or Law Exclusion barred coverage for the raze-related costs.
The court also rejected several other assertions by DMB, including that Germantown was obligated to cover the costs associated with the raze based on state statutory law relating to a property insurer’s duty to “provide for payment of any final settlement under the policy.” The court explained that “final settlement” means an amount that an insurer owes and that here, Germantown did not owe payment associated with the raze order.
Finally, the court rejected DMB’s contention that a reasonable insured would not understand the policy to exclude coverage for damages sustained because of a raze order because such an interpretation would render coverage “essentially illusory.” The court emphasized the clear language of the exclusion and its breadth of application to loss “regardless of any other cause or event that contributes concurrently or in any sequence to the loss.”
Comments
A New Jersey appellate court, faced with a similar factual record and exclusionary language, reached a contrary conclusion. See Danzeisen v. Selective Ins. Co. of Am., 689 A.2d 798 (Super. Ct. App. Div. 1997). However, the court deemed that decision unpersuasive, emphasizing that the New Jersey court failed to apply the plain meaning of the unambiguous exclusion.