In September 2007, Eric and Lizbeth Reichert purchased a house in Huntington Beach, California, that they planned to remodel. They hired architect Ben Cauthen to design the project and Krecu Construction to perform and/or oversee the work. The house was located in a federally designated flood plain. Plans were submitted to the appropriate city authorities.

Certain aspects of the plan triggered a city “in-fill” requirement that neighbors sign off on window placement. Also triggered was a Federal Emergency Management Agency (FEMA) requirement that the ground floor be above the base flood level. To avoid having to satisfy these requirements, the architect changed the plans.

The second set of plans called for certain walls to stay in place, eliminating the in-fill requirement. An independent appraiser determined that after remodeling, the property would be less than 50% improved; this eliminated the FEMA flood zone requirement. The city approved the second set of plans.

During the demolition process, Travis Bond, the on-site project manager for Krecu, discovered that the plans called for 10-foot ceilings, but that the walls that were to stay in place would only support eight-foot ceilings. Nevertheless, Cauthen and Krecu, when consulted, both told Bond to go ahead and tear down the walls.

The city eventually discovered that the project was not in compliance with the approved plans and increased the improvement level to more than 50%, triggering the in-fill and FEMA requirements. The city had the authority to issue a variance from the FEMA requirement, but it refused to do so. According to the city, bending the rule for the Reicherts would put their neighbors at risk. The property eventually was demolished by order of the city.

The Reicherts filed suit against Cauthen and Krecu and filed a claim under their State Farm General Insurance Company homeowners policy. State Farm denied coverage on the grounds that the demolition was not an “accident” as defined in the policy and that the policy excluded coverage for loss caused by the enforcement of any law or ordinance. The Reicherts sued State Farm, and the insurer filed a motion for summary judgment.

The court found in favor of State Farm, holding that the demolition was not an “accident” within the meaning of the policy and that there was an obvious exclusion of losses caused by enforcement of any law or ordinance. The Reicherts appealed.

The relevant language of the law or ordinance exclusion stated: “We do not insure under any coverage for any loss which is caused by one or more of the items below, regardless of whether the event occurs suddenly or gradually, involves isolated or widespread damage, arises from natural or external forces, or occurs as a result of any combination of these: a. Ordinance or Law, meaning enforcement of any ordinance or law regulating the construction, repair or demolition of a building or other structure.”

On appeal, the Reicherts acknowledged that this exclusion was clear; they argued, however, that the policy provided coverage under “Option OL,” a building ordinance or law coverage option. This option appeared on the declarations page of the Reicherts’ policy and provided for an additional 25% of coverage over the policy limit of $800,000 for the increased cost of complying with building, zoning, or land use law in rebuilding a dwelling damaged by an insured loss. The appellate court found that, although Option L would have provided additional coverage if the house had burned down, nothing in the option affected the law or ordinance exclusion.

The Reicherts also argued that the law or ordinance exclusion did not apply because the cause of the demolition was not the city’s enforcement of the ordinance, but the negligence of the architect and contractor. The court acknowledged that, although their argument was understandable, the exclusion clearly applied. The court noted: “Here, interposed between the plans which called for the simultaneous having, and dispensing, of certain eight-foot walls and the eventual demolition of the property, was the very deliberate decision of a city not to risk its FEMA rating, and the concomitant decision to enforce its building code.” Thus demolition of the house by order of the city was within the ordinance or law exclusion.

The lower court’s decision in favor of State Farm was affirmed.

Court of Appeal, Fourth District, Division 3, California. Reichert v. State Farm General Insurance Company. G046582. December 28, 2012. 2012 California Appellate Reporter 4th 1543, 152 California Reporter 3d 6