No Indemnity for Old Damage

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St. Matthews Church of God and Christ (St. Matthews) is located in St. Paul, Minnesota sued State Farm Fire and Casualty Company (State Farm) who insured St. Matthews. The policy provided replacement cost coverage for damage to St. Matthews’s buildings.

In St. Matthews Church of God and Christ v. State Farm Fire and Casualty Company, No. A21-0240, Supreme Court of Minnesota (November 23, 2022) St. Matthews sought payment for damaged masonry wall when covered peril only damaged drywall covering the masonry that was cracked as a result of old age.

FACTS

In June 2017, a storm damaged the property of St. Matthews, including the building’s drywall. State Farm agreed to cover repair costs for the damaged property caused by the storm, including removal and replacement of the damaged drywall. When the damaged drywall was removed, cracks in the masonry were discovered. There is no dispute that the cracks in the masonry preexisted the storm. However, because the cracks in the masonry violated the city’s building code, the City of St. Paul (City) would not allow St. Matthews to replace the drywall without also repairing the masonry. St. Matthews requested that State Farm reimburse it for the cost of repairing the masonry.

At issue is the interpretation and application of Minn. Stat. § 65A.10, subd. 1 (2020) (“the statute”). The statute requires replacement cost insurance to cover the cost of repairing any “damaged property in accordance with the minimum code as required by state or local authorities.” In “the case of a partial loss,” replacement cost insurance is required to cover only “the damaged portion of the property.”

St. Matthews’s policy provided replacement cost coverage, meaning that, in the event of a loss, the insurer agreed to compensate for that loss without taking into account depreciation. State Farm’s typical policy does not require it to cover the cost of bringing property that is lost or damaged up to code. But the policy issued to St. Matthews included a Minnesota Endorsement, which states, in relevant part:

If this coverage is provided on a replacement cost basis we will pay the increased cost of replacing, rebuilding, repairing or demolishing any building in accordance with the minimum code in force at the time of loss as required by state or local authorities, when the loss or damage is caused by a Covered Cause Of Loss. In case of a partial loss to the covered property, we will pay only for the damaged portion of the property. (emphasis added)

By December 2018, State Farm paid St. Matthews $107,053, an amount that included the cost of replacing and repairing the drywall.

St. Matthews was required to obtain a building permit from the City to make the necessary repairs, including replacing the drywall. The City was concerned about the defects in the existing masonry wall which rendered the wall out of code. St. Matthews subsequently requested State Farm to pay the cost of bringing the masonry up to code. In response, State Farm hired a consultant to evaluate the damaged masonry and determine the cause of damage. The consultant concluded that the “cracked and out-of-plumb condition . . . was a longterm condition unrelated to the storm ….”

On cross-motions for summary judgment, the district court granted summary judgment to State Farm.

ANALYSIS

The parties agree that the damaged property at issue is a partial loss and that, before the drywall can be repaired, St. Paul’s city code requires that the masonry be repaired sufficiently to bring it in accordance with minimum code.

The statutory language “[i]n the case of a partial loss . . . this coverage applies only to the damaged portion of the property” is susceptible of only one reasonable interpretation. In the event of a partial loss, the insurer’s obligation is limited to bringing up to code that “portion of the property” that was damaged.

The Supreme Court concluded that the statute means that, when a partial loss like St. Matthews suffered occurs, State Farm’s obligation to bring the damaged portion of the property up to minimum code is limited to repairs necessary to bring up to code that part of the property that was damaged in the insured event. Since it was undisputed that only the drywall was damaged in the storm. It was also undisputed that the masonry was damaged earlier as a result of a different, unknown cause. Consequently, State Farm was not required to pay for repairs to bring the masonry up to code under the statute.

Contrary to St. Matthews’s assertion that the drywall and the masonry were parts of a single damaged item: the wall; which includes both the drywall and the masonry, the masonry wall was independent of the masonry to which it was attached.

All parties agreed that the damage to the masonry was not caused or impacted by the storm. Accordingly, the damage to the masonry was not independently covered by State Farm’s policy. Viewing the project from the perspective of a drywall installer there was nothing in the condition of the masonry that prevented the installation of new drywall.

The Supreme Court concluded that under a plain reading of the statute in the case of a partial loss, replacement cost coverage applies only to the damaged portion of the property covered by a cause of loss. Only the drywall was damaged because of the storm, but the masonry was not. Therefore, only the damaged drywall is subject to the statute’s code-compliance provision.

Under the statute, when a partial loss occurs, 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.

Insurance requires, by definition, to respond only to a contingent or unknown event. It cannot, and should not, respond to damage that preceded the date the policy came into effect from causes that were not caused by a peril insured against. Since the only damage by the storm was to the drywall and since both parties agreed that the damage to the masonry was not caused by the storm that damaged the drywall. Unfortunately for the church it did not acquire code compliance coverage and the statute it relied on was not as broad as the church desired.

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Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com

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