Lessons from Constructive Total Loss in Property Insurance

The Origins of Constructive Total Loss

The doctrine of constructive total loss has its roots in marine insurance, where shipowners were permitted to abandon a vessel when repairs were impractical or illegal and still recover as though the ship were completely destroyed. Over time, this principle migrated to property insurance law on land.

Courts recognized that a structure need not be physically leveled to the ground to be considered a total loss. If condemnation orders or legal prohibitions against repair left the insured with no viable option to rebuild, the law treated the property as a total loss. The valued policy laws that many states enacted in the late nineteenth and early twentieth centuries were built on this logic, ensuring that policyholders would not be trapped with unusable property and only partial recoveries.

I would suggest readers interested in the history of the doctrine read Understanding the Total Constructive Loss Doctrine in Property Insurance Policies.

Valued Policy Laws and the Burden on Insurers

As the law review article, Applications & Complications – Recover Under the Valued Policy Law, ¹ by then property insurance defense attorney Herbert J. Baumann Jr. explains, valued policy laws were enacted to prevent insurers from inflating values to collect higher premiums while later disputing the true value after a loss. These statutes fixed in advance the recovery amount in the event of a total loss.

Within this framework, the question often becomes whether a particular loss is total or partial. Courts developed two tests. One was the identity test, where a building is deemed a total loss if it loses its character as a structure. The other test was the restoration test, where the loss is total if a prudent owner would not use the remains to rebuild.

Constructive total loss extends these ideas by recognizing that when a governmental body prohibits repair, the property must be treated as a total loss regardless of what remains standing. This doctrine places an important burden on insurers: if they believe repair is possible, they must contest condemnation orders and move promptly to initiate reconstruction. Failure to do so risks full policy liability, even when partial repair might have been possible.

Proximate Cause and Condemnation Disputes

A particularly instructive lesson from the cases is how courts analyze causation in condemnation scenarios. Sometimes condemnation follows from both insured and non-insured conditions, such as fire damage combined with preexisting termite infestation or structural decay. Courts have split in their approaches. Some hold insurers responsible only for the portion of damage caused by the insured peril, while others find the insured peril to be the proximate cause of the condemnation and require full payment.

The takeaway for policyholders and adjusters is that causation is often the battlefield. Establishing that the covered peril was the legal and factual reason for the condemnation order can mean the difference between a partial recovery and policy limits.

The Modern Relevance of Constructive Total Loss

In my commentary on this subject, noted in the article I referenced above, I have emphasized that constructive total loss continues to be highly relevant today, especially where building codes and ordinances come into play. When a building cannot be legally repaired because of safety standards or modern code requirements, policyholders should argue that the loss is total under longstanding precedent. In such cases, ordinance or law exclusions may not apply in the same way as with partial losses, because there is no viable repair path at all. Adjusters must be alert to these circumstances, documenting not only the physical condition of the property but also the legal constraints that prevent rebuilding.

Practical Lessons for Adjusters and Policyholders

The lessons from this doctrine are clear. First, constructive total loss ensures that insureds are not left with condemned or unusable buildings and only partial settlements. Second, insurers bear the burden of swift action when faced with condemnation orders, and delay can lead to full liability. Third, causation must be carefully developed with testimony from the officials issuing the condemnation and experts who can tie the order to the insured peril. Finally, understanding the history of this doctrine allows adjusters and policyholders to recognize that constructive total loss is not a loophole or technicality, but a long-established principle meant to achieve fairness in the claims process.

I plan to follow up on two Wisconsin cases in subsequent posts. One will show the traditional view where the policyholder prevailed. The other is from a more recent unpublished decision where the insurer prevailed. Constructive total loss doctrine will vary between states, but all property insurance adjusters should understand the issues and factual interplay to properly adjust losses when confronted with these common issues.

Thought For The Day 

“If an insured building is damaged to the extent that repairs are prohibited by condemnation proceedings under a local ordinance, the structure is deemed a constructive total loss and the full amount of the valued policy is payable.”
—Herbert J. Baumann Jr.

¹ Herbert J. Baumann, Jr., Applications & Complications – Recover Under the Valued Policy Law, 19 Brief 45 (1989-1990).