On November 23, 2022, the Minnesota Supreme Court released St. Matthews v. State Farm, providing guidance on the minimum ordinance and law coverage required by Minn. Stat. § 65A.10, subd. 1, to be included in replacement cost property policies in the case of a partial loss. The statute provides:
Subject to any applicable policy limits, where an insurer offers replacement cost insurance: (i) the insurance must cover the cost of replacing, rebuilding, or repairing any loss or damaged property in accordance with the minimum code as required by state or local authorities;…. In the case of a partial loss, unless more extensive coverage is otherwise specified in the policy, this coverage applies only to the damaged portion of the property. (Emphasis added.)
The Court concluded that when a partial loss occurs to a property, the statute provides that “an insurer’s obligation to bring the damaged portion of the property up to minimum code is limited to repairs necessary to bring up to code only that part of the property that was damaged in the insured event.” The statute does not require the insurer to bring up to code every item that is discovered to be out of compliance with code during the process of repairing or replacing damaged property, even if a municipality requires those other items to be brought up to code before it will issue a permit for repairing or replacing the item that was damaged as a result of the insured event.
Important to the Court’s analysis was that coverage is available for purchase in the insurance market that provides more-than-the minimum ordinance and law coverage, but St. Matthews had not paid for such coverage. The analysis is fact-specific, and when reviewing coverage, it is important for an insurer to consider both the minimum coverage required by statute and also the specific language of the ordinance and law coverage provided in the policy.
Facts of St. Matthews
In St. Matthews, a June 2017 storm damaged property of St. Matthews, including exterior drywall that had been built over a common masonry wall between two lowslope roofs on the property. State Farm agreed to cover the repair and replacement of the damaged drywall.
When the damaged drywall was removed, cracks in the masonry wall underneath were discovered. An appraisal panel determined that the cracks in the masonry preexisted the storm and were not caused by the storm.
Because the cracks in the masonry violated the city’s building code, the city would not allow St. Matthews to replace the drywall without first repairing the masonry. St. Matthews argued that ordinance and law coverage in its property policy required State Farm to pay for the cost of repairing the masonry. However, the Court agreed with State Farm that because the storm did not damage the masonry, no ordinance and law coverage existed to cover the cost of bringing the masonry wall up to code. The condition of the masonry wall that created the building code violation was present before the storm and was not caused by the storm.
In alleging that the ordinance and law coverage applied, St. Matthews argued that Minn. Stat. § 65A.10, subd. 1, requires an insurer to bring up to code every item that is discovered to be out of compliance during the process of repairing or replacing damaged property and which a municipality requires be brought up to code before it will issue a permit for repairing or replacing the item that was damaged as a result of the insured event. The Court found no evidence “in the limited and narrow language of the statutory text that supports the conclusion that the Legislature intended such a broad expansion of insurer liability to losses or damage not the result of the insured event when only a partial loss occurs.”
St. Matthews argued that the language of the statute requiring coverage for “any loss or damaged property” requires an insurer to not only repair the damaged property but also to cover the cost of repairing any not-up-to-code item (even items not damaged as a result of an insured event) when failing to make that repair would prevent restoring an item actually affected by an insured event to its full value. In other words, St. Matthews argued that ordinance and law coverage was required when, but for the repair of an additional item not damaged by an insured event, the item damaged in the insured event would not recover its value. The Court did not decide the meaning of “loss” as used in the statute, but concluded the language of the statute did not support the “direct connection test” as proposed by St. Matthews.
St. Matthews also argued that the statutory reference to “damaged portion of the property” should be applied broadly to be mean both the drywall damaged in the storm and the masonry wall that was not damaged in the storm. The dissent agreed with St. Matthews. The majority rejected this argument, emphasizing it was undisputed that the damage to the masonry was not caused or impacted by the storm, and was not independently covered by the State Farm policy.
Of further importance to the majority was the fact that the drywall itself could be completely replaced in compliance with the municipal code without making any additional changes to other parts of the property. In other words, apart from the city’s permitting requirement that precluded St. Matthews from replacing the drywall without first fixing the masonry damage, there was nothing to suggest that St. Matthews could not have installed the drywall without any repairs to the masonry. The two were stand-alone repairs. The majority expressed no opinion on how it would resolve alternative scenarios. For example, it raised a hypothetical situation where a section of aluminum wiring was damaged in a house, and the building code required it to be replaced with copper wiring. The Court noted that if the building code also prohibited the installation of new wiring that resulted in a mixture of copper and aluminum wiring, that prohibition might raise a different question of whether § 65A.10, subd. 1, would require replacement of non-damaged aluminum wiring to comply with the wiring provisions of the code.
Three members of the Court dissented. These justices would have found that damage to the drywall required ordinance and law coverage to broadly apply to all code upgrades required to any part of the wall. The dissent also argued that public policy supported finding insurance coverage for repairs that would remedy building code violations. It worried that the majority’s rule would encourage insurers to adopt an infinitely narrow view of “the damaged portion of the property.”
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Beth Jenson Prouty submitted an Amicus Brief on this case for amicus curiae American Property Casualty Insurance Association (APCIA).