The insured (tenant) entered into a lease agreement with the building owner.
The tenant provided the insurance requirements to the agent by copying that page of the lease and sending it to the agent. Under the terms of the lease, the tenant is required to purchase insurance to cover the building “at the cost to repair or replace the building”. So, the agent did exactly that – provided a policy that covered the building for replacement cost. The building sustained major damage from a fire.
As the adjustors reviewed the claim and discussed the repair of the building, it became immediately apparent that a significant number of changes were required to comply with current building codes. That is when the first hint appeared of the arguments that were about to erupt that resulted, ultimately, in litigation. The landlord claimed that the language of the lease was very clear – repair and replace the building and if that means that new codes must be complied with, then do it.
The insurance company said no coverage for ordinance or law compliance. Well, according the mediator – they were both right. He felt that the lease was very clear and that the insurance policy excluded ordinance or law. The tenant had to cough up the money to bring the building up to code. Well, you know where this is headed – right to the agent’s doorstep in the form of a lawsuit. This case did not go to trial, but was settled in favor of the insured on the courthouse steps after 3 ½ years of legal wrangling between the insured’s lawyers and the insurance agent’s E & O lawyers. The agent paid their $50,000 deductible.
Just one of the lessons from this claim: Take lease language very seriously and don’t “interpret”. The first misstep by the agent was reading “insurance lingo” into the lease wording. There really is a difference between the cost to repair or replace and replacement cost insurance language. On another level – it is helpful to have a thorough understand of insurance policy language and how it relates to lease language.