Reichert v. State Farm Gen. Ins. Co., G046582

• Decision Date: 10 April 2013
• Docket Number: G046582
• Citation: 212 Cal.App.4th 1543,152 Cal.Rptr.3d 6
• Court: California Court of Appeals Court of Appeals
• Parties: Eric REICHERT et al., Plaintiffs and Appellants, v. STATE FARM GENERAL INSURANCE COMPANY, Defendant and Respondent.

212 Cal.App.4th 1543

152 Cal.Rptr.3d 6

Eric REICHERT et al., Plaintiffs and Appellants,

v.STATE FARM GENERAL INSURANCE COMPANY, Defendant and Respondent.

G046582

Court of Appeal,

Fourth District, Division 3, California.

Filed December 28, 2012;

Review Denied April 10, 2013

Appeal from a judgment of the Superior Court of Orange County, David R. Chaffee, Judge. Affirmed. (Super. Ct. No. 30–2011–00443407)

Cummins & White, Newport Beach, and Daniel R. Wildish for Plaintiffs and Appellants.

Robie & Matthai, Michael J. O'Neill and Natalie A. Kouyoumdjian, Los Angeles, for Defendant and Respondent.

OPINION

BEDSWORTH, ACTING P.J.

Eric and Lizbeth Reichert attempted a remodel of their newly-purchased Huntington Beach house. Before construction was finished, city building inspectors discovered the project did not conform to Huntington Beach floodplain regulations, and ordered the property demolished. The Reicherts then sued their architect and their contractor, and also made a claim on their homeowners' insurance policy. Their insurance company denied the claim, asserting the demolition was not an accidental loss, and in any event the loss was excluded by a provision in their policy saying there is no coverage for loss caused by the enforcement of any law or ordinance. The Reicherts sued their insurer, and the case now comes to us after the insurer's successful motion for summary judgment. We affirm. This seems, unfortunately for the Reicherts, a rather clear example of the “law or ordinance exclusion.”

I. FACTS

The trial judge wrote an extraordinarily cogent and detailed statement of facts in his minute order granting the insurer's summary judgment motion. He looked not only at the bare statement of facts which each side agreed were undisputed, but also at the underlying evidence supporting those facts, and made appropriate record references. (See Code Civ. Proc., § 437c, subd. (c) [“The motion for summary judgment shall be granted if all the papers submitted show that there is no triable issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” (Italics added.) ].) In this appeal the Reicherts make no attempt to assert the minute order's statement of facts was in any way incorrect, and we will not attempt to improve on the trial judge's work. The next seven paragraphs are excerpted almost verbatim from the trial judge's statement of facts, though we have omitted record references and deleted some extraneous material as shown by ellipses. This was no phoned-in minute order:

In September 2007, plaintiffs Eric and Liz Reichert purchased a two-story home in Huntington Beach at 18341 Rain Circle, which sits in a designated flood zone. Shortly after closing escrow, plaintiffs hired Ben Cauthen (hereinafter “Architect”) to design a substantial remodel of the home. Plaintiffs also contracted with Krecu Construction (hereinafter “Contractor”) to perform and/or oversee the project as the general. Plans for the remodel were submitted to the City of Huntington Beach for approval:

—The first set depicted what amounted to a “substantial” remodel since it (1) improved the overall value of the property more than 50% and (2) modified more than 50% of the existing walls. Because of this, additional planning elements were triggered, including a City “in-fill” requirement that neighbors sign off on the placement of windows and a federal FEMA requirement that the ground floor be constructed above the base flood level (which in this instance was about 9 feet); since this triggered significant additional cost and headache (i.e., raising the house 9 feet and staggering windows based on neighbor preference), they went back to the drawing board.

—The second set of plans was not too different from the original. One change was the designation of several existing walls that were to remain in place and become part of the new construction. By doing this, plaintiffs avoided the City's “in-fill” requirement. In addition, plaintiffs secured an independent appraisal of their property, which, compared to the revised plans, came in at under 50% improved value escaping the FEMA flood zone issue. As it turns out, the revised plans had a value improvement of about 49.93%, which was just barely enough to get the project permitted.

The contractor handled the job through Travis Bond (“Bond”), the designated on-site project manager. During the demo phase (June/July 2008), a light bulb went on over Bond's head: the second set of plans—the one approved by the City—still called for rooms upstairs and downstairs to have 10–foot ceilings, but in order to get the City to sign off on the second set of plans, plaintiffs covenanted to leave in place several original, existing walls. The problem? Those original, existing walls supported 8–foot ceilings, not 10–foot. Ouch.

Bond contacted the contractor and architect for direction, and was told to go ahead and tear down all the walls, including the specific walls designated to remain as part of the approved plans. Bond did as instructed, and brought the walls down.

During the next City inspection (mid-August 2008), it was discovered that plaintiffs had exceeded the scope of the permit issued. By taking out the extra walls, the square footage and value of the project increased. Plaintiffs had only $300 of wiggle-room to stay under the 50% FEMA trigger, and putting in eight brand new walls clearly increased the value more than that. There was no question that removing those additional walls increased the linear footage enough to trigger the City's “in-fill” requirement. A “stop-work” order was issued, halting the project on the spot.

The contractor proposed a variance, but later learned that while the City could issue a variance from the FEMA requirement, doing so might cost the City its FEMA rating, leading to a widespread increase in the cost of flood insurance for every resident of the City living in a flood zone. The City expressed (informally) its unwillingness to bend the rule for the Reicherts at the risk of hurting every other Huntington Beach citizen. Plaintiffs never formally applied for the variance, as it was a foregone futility. Instead, they filed a civil action against the contractor and architect (2009–125917) and made a claim for insurance benefits from State Farm. The property (apparently the entire structure in progress) was demolished by order of the city at some undesignated time afterwards.

The court granted summary judgment on two theories: The demolition could not be an accidental loss as required under the insurance contract, and the exclusion of losses for enforcement of any ordinance or law was “fairly obvious.”

II. DISCUSSION

A. Law or Ordinance Exclusion

We will pass on the question of whether the Reicherts were sufficiently involved in the decision to tear down the walls to say there was no “accidental direct physical loss” as required by the policy. As the trial judge's minute order recognized, there is at least some dispute as to how much involvement the Reicherts actually had.¹ (See MRI Healthcare Center of Glendale, Inc. v. State Farm General Ins. Co. (2010) 187 Cal.App.4th 766, 781, 115 Cal.Rptr.3d 27 [“ ‘Accidental’ in an insurance policy typically means ‘unintended and unexpected by the insured.’ ”].²) We move directly to what the trial judge aptly called the “fairly obvious” issue, namely, whether the law or ordinance exclusion applied.

The relevant language from the insurance policy stating the law or ordinance exclusion is this: “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.”

By way of background, it is necessary to note a split in the case law regarding the law or ordinance exclusion. While the split does not directly involve the case before us, the dueling cases do shed light on two issues that are before us: First, just what does the law or ordinance exclusion apply to, and second, how exactly does Option OL in the Reicherts' homeowners' policy operate in practice.

The split in the case law concerns whether, after a loss from a covered peril, such as fire, a first-party property insurer is required to pay for code upgrades required to effectively replace the lost or damaged property, even if the required code upgrades mean the insureds effectively receive something better than they originally had. Courts have struggled with the question of whether a party whose house was non-compliant before the loss deserves a code-compliant house after the loss. The cases may be divided into two camps—“anti-windfall” versus “pro-compliant”—and in California the battle over a possible “windfall” is how the two sides have characterized their approach to the exclusion.

So, on the one hand, Bischel v. Fire Ins. Exchange (1991) 1 Cal.App.4th 1168, 2 Cal.Rptr.2d 575 held a property insurer was not obligated to repair a dock destroyed by careless and unauthorized mooring during a storm (a covered peril) to the extent of bringing the dock up to the condition local code required. The insurer was only obligatedto pay to bring the dock back to its preloss condition. (Bischel, supra, 1 Cal.App.4th at p. 1178, 2 Cal.Rptr.2d 575 [emphasizing law or ordinance exclusion “properly should have foreclosed further coverage” beyond restoration to preloss status].) Bischel put its imprimatur on the idea “the purpose of insurance is not to put the insured in a better position than he or she was before the loss but rather to compensate for the actual loss sustained.” (Id. at p. 1173, 2 Cal.Rptr.2d 575.) ³

On the other hand, Fire Ins. Exchange v. Superior Court (Altman) ...