Ordinance or Law Coverage Endorsement Found Not Applicable Following Ammonia Leak In Piping System
An ammonia leak occurred following an incident at a California ice plant when a heavy basket containing water fell that led to a rupture in the plant’s piping. The owner of the plant made an insurance claim on its general commercial liability insurance policy and the insurer and the owner disputed the amount of available coverage. Specifically, the insurer contended that the policy covered the direct physical damage to the ammonia piping but that it did not cover damage caused by the corrosion and deterioration of the plant’s 40-year old piping system (which was discovered when attempting to repair the rupture in the pipe). Following the incident, an investigator from the Riverside County Department of Environmental Health inspected the damage and concluded the plant was in violation of various California Health & Safety Codes because of the piping’s corrosion, and required the following required repairs to come into compliance: “replacement of severely corroded piping, replacing all piping regardless of its condition and changing the entire process to eliminate any piping within the ice making tank.”
The parties contested coverage under multiple provisions of the policy, but worth noting is the dispute on whether the policy’s Ordinance or Law Coverage endorsement applied to provide coverage. Specifically, that endorsement provided for coverage “If a Covered Cause of Loss occurs to covered building property, we will pay … for the loss in value of the undamaged portion of the building as a consequence of enforcement of any ordinance or law that: (a) Requires the demolition of parts of the same property not damaged by a Covered Cause of Loss; (b) Regulates the construction or repair of buildings …; and (c) Is in force at the time of loss. The owner of the plant argued that this endorsement applied because the laws regulating permissible refrigerant pipe material and the Department of Environmental Health’s directive regarding the conditions under which the system could resume operations. The U.S. District Court for the Central District of California disagreed and concluded that the Ordinance or Law Coverage endorsement was not applicable. The court explained that California regulations did not preclude fixing the rupture with an isolated weld repair and that the Department of Environmental Health was enforcing laws regarding the safe managing of hazardous substances, not the construction or repair of structures. In other words, just because that agency has the authority to compel enforcement through a fines does not establish that it issued the directive pursuant to an ordinance or law covered by the disputed endorsement (i.e., a law regulating the construction or repair of the piping system).
The court developed the following explanatory analogy, which is instructive:
“The logical boundaries to the scope of [Ordinance or Law] Coverage are best explained by analogy to a hypothetical. A store has a general commercial liability insurance policy. Two laws apply to the store: (1) a law requiring a wheelchair accessible restroom, and (2) a law requiring fire sprinklers. The laws are different in that the restroom law does not require immediate action — the storeowner does not need to close shop and expand the bathroom right away, but if the storeowner decides to remodel other aspects of the store, it must also expand the bathroom at that time. The fire sprinkler law is immediately applicable; if the store does not have working fire sprinklers at any time, it is violating the law. In the hypothetical, the store does not have a wheelchair accessible restroom or fire sprinklers. However, if an inspector came to check the store’s compliance, it would only issue a violation for the sprinklers because the store owner’s obligation to expand that bathroom has not been triggered. One day, a car crashes into the storefront. The accident is a covered cause of [*28] loss under the insurance policy and its repair requires a substantial rebuild of the front façade of the store. This rebuild triggers the obligation under the wheelchair accessibility law to expand the bathroom in the back of the store. It is entirely logical that, under an expansive OL Coverage provision, the insurance company would have to pay not only for the storefront rebuild, but also for the cost of expanding the existing restroom, even though it was undamaged, because the covered cause of loss triggered obligations under a law regarding restroom construction. However, in this scenario, the insurance company would not also be obligated to pay for installing fire sprinklers at this time because that deficiency and obligation pre-dated the occurrence of the covered cause of loss. If a causation requirement is not read into the OL Coverage provision, the results are absurd.3 Any covered cause of loss would thrust upon the insurer an obligation to bring the entire insured property up to various building codes when that obligation was already alive and rightfully resting on the insured just prior to the covered cause of loss.”
