Constructive Total Loss in Property Insurance

Hugh Wood’s 1994 University of Miami Law Review comment, The Insurance Fallout Following Hurricane Andrew: Whether Insurance Companies Are Legally Obligated to Pay for Building Code Upgrades Despite the “Ordinance Or Law” Exclusion Contained in Most Homeowners Policies, ¹ is an important discussion about the “constructive total loss” doctrine at the center of the post-Hurricane Andrew coverage fights. The article explains that a building can be deemed a total loss whenever a government ordinance or law blocks repair, even if large portions of the structure remain.

The “constructive total loss” concept did not begin in property insurance. Nineteenth-century maritime insurers allowed shipowners to treat a vessel as totally lost when the cost of salvaging her exceeded what she would be worth after repairs. This approach was later imported into land-based fire policies to prevent harsh outcomes when rebuilding was illegal or impractical.

Wood shows how Florida courts borrowed two tests from earlier cases. The “loss-of-identity” standard asked whether the building had forfeited its character. The “usable-remnant” standard asked whether any sensible owner would reuse what is left.

Elevation rules adopted after Hurricane Andrew typically failed both tests; raising a slab-on-grade home to new flood heights was so invasive and expensive that repair ceased to make economic sense. Once a court labels the damage a constructive total loss, the ordinary “Ordinance or Law” exclusion falls away because there is no “partial loss” to which increased-cost limitations could attach.

At the time the article was written, that finding also triggered Florida’s Valued Policy Law, then a potent statute that required carriers to pay the face amount of the policy for any total loss, whether “actual” or “constructive,” and regardless of contrary exclusions. Wood, therefore, urged litigators to plead constructive total loss and the Valued Policy Law in tandem, arguing that public policy favored shifting code-upgrade costs from individual homeowners to the insurance pool.

Three decades later, practitioners must pair Wood’s analysis with legislative reality. Amendments enacted after the 2004–2005 storm seasons tightened Fla. Stat. § 627.702 so that automatic face-value recovery now applies only when the total loss is caused by a peril actually covered under the policy; mixed-cause scenarios no longer guarantee this result.

That change means constructive total loss remains a powerful tool for defeating Ordinance-or-Law defenses, but it is no longer a silver bullet for securing policy limits. Counsel must still prove that the precipitating peril, wind, fire, or another covered cause meets the statute’s narrower trigger and that no excluded peril broke the causal chain.

Even with that caveat, Wood’s treatment of constructive total loss provides excellent insight into how the doctrine applies. It reminds property insurance adjusters and advocates that ordinances do not create the loss; they merely acknowledge its totality. It frames the argument that rebuilding prohibitions erase any practical difference between “partial” and “total” damage. And it provides a roadmap of precedents such as Citizens Ins. Co. v. Barnes and Netherlands Ins. Co. v. Fowler, on which Florida courts still rely when repairs are barred by law.

For property insurance professionals confronting today’s code upgrade disputes, whether in coastal areas, wildfire-prone California, or anywhere building regulations tighten after a catastrophe, the constructive total loss doctrine remains an essential consideration. When government rules make safe, lawful reconstruction untenable, the doctrine can convert what appears to be a repair claim into a claim for total loss, reshaping both coverage analysis and settlement amounts owed.

This post follows recent posts on this topic: The Hidden Insurance Gap: Why New Homes and Businesses Need Ordinance or Law Coverage, and Insurance Coverage After a Raze Order: Strategies for Overcoming Ordinance or Law Exclusions.

Thought For The Day

“The difference between death and taxes is death doesn’t get worse every time Congress meets.”
— Will Rogers

¹ Hugh L. Wood, The Insurance Fallout Following Hurricane Andrew: Whether Insurance Companies Are Legally Obligated to Pay for Building Code Upgrades Despite the “Ordinance Or Law” Exclusion Contained in Most Homeowners Policies, 48 U. Miami L. Rev. 949 (1994).