Insurance Coverage After a Raze Order: Strategies for Overcoming Ordinance or Law Exclusions

When a devastating fire damages a building and a municipality orders it razed, the instinctive reaction of many policyholders is to expect that their insurance will cover the total loss. That expectation, however, can run into serious obstacles depending on the fine print of the insurance policy and, importantly, the law of the state where the loss occurs. A recent Wisconsin case, Distinguished Multiplying Buildings, LLC v. Germantown Mutual Insurance Company, ¹ highlights how critical it is to understand both policy terms and the applicable state law.

In this case, D.M.B. owned an apartment building that suffered a major fire. Following an inspection, the City of Eau Claire issued a raze order, finding that the damage made the building dangerous, unsafe, and unreasonable to repair. D.M.B. argued that under long-standing Wisconsin law, the issuance of a raze order constituted a “constructive total loss,” meaning the insurer should be required to pay the full amount necessary to replace the building. They pointed to cases from other states to support the idea that when a fire renders a building a public nuisance, leading to a mandatory demolition, the insurer bears the cost, regardless of what the policy exclusion language says.

Germantown Mutual Insurance Company countered that the policy clearly contained an Ordinance or Law exclusion, which barred coverage for any loss resulting from the enforcement of laws requiring the tearing down of property. According to Germantown, once the city ordered the building razed, the loss stemming from that enforcement action was excluded under the policy, even though the fire damage was a covered cause of loss.

The insurer stressed that the fire and the raze order were distinct events: the fire caused physical damage, but it was the raze order that legally required the destruction of the entire structure. Therefore, Germantown argued that the insurance policy did not cover the demolition of parts of the building that might have survived the fire but were nonetheless razed under municipal authority.

The Wisconsin courts agreed with Germantown. The trial court found that while the fire was indeed a covered cause of loss, the raze order triggered the Ordinance or Law exclusion. The court emphasized that D.M.B. had the right to challenge the raze order under Wisconsin law, but it failed to do so. It also noted that without the raze order, there was no conclusive evidence that the building was a total loss. This led the court to rule that the raze order was an intervening, separate cause of loss and that the losses associated with it fell squarely within the policy’s exclusion. On appeal, the Wisconsin Court of Appeals affirmed the decision, reinforcing that the constructive total loss doctrine could not override clear and unambiguous policy exclusions.

This outcome is not universal. Other states have taken a different approach when analyzing similar issues. Courts in jurisdictions like New Jersey and others have held that when a building is rendered unfit for use due to a covered peril, and a subsequent governmental order mandates its demolition, the loss remains attributable to the original peril. In those states, the constructive total loss doctrine often leads to full recovery under the policy, regardless of ordinance or law exclusions, because the demolition is seen as a foreseeable consequence of the initial covered event, not a new and independent cause.

The “constructive total loss doctrine” must be viewed through the lens of the specific state’s laws and legal interpretations. Policyholders and their advocates cannot assume that a favorable result in one jurisdiction will translate to another. Whether an ordinance and law exclusion will defeat coverage for a razed building depends heavily on how the courts in that state interpret the relationship between the initial covered loss, the governmental action, and the language of the insurance contract.

The Wisconsin courts have signaled a strong respect for the plain language of insurance policies, even when that means denying full coverage after a devastating fire and government-ordered demolition. Policyholders, property insurance adjusters, insurers, and their counsel must, therefore, pay close attention not only to the facts of the loss but also to the precise wording of the policy in relation to controlling state law. In other states, the balance may tip differently, offering broader protection under the constructive total loss doctrine.

Finally, insurance agents should use examples like this case to explain the importance of purchasing Ordinance & Law Coverage. Policyholders purchasing sufficient amounts of coverage for loss caused by Ordinance or Law enforcement would have prevented this entire discussion.

I plan to discuss more about the “total constructive loss” doctrine in upcoming posts.

Thought For The Day 

“Insurance: An ingenious modern game of chance in which the player is permitted to enjoy the comfortable conviction that he is beating the man who keeps the table.”
Ambrose Bierce

¹ Distinguished Multiplying Buildings v. Germantown Mut. Ins. Co., No. 2023AP1717, 2025 WL 1165881 (Wisc. App. Apr. 22, 2025).