This is the second of three blogs about constructive total loss, and follows yesterday’s post, Lessons from Constructive Total Loss in Property Insurance. 1 The traditional answer to the title question can be found in a 2006 American Bar Association law review by insurance defense attorney John Garaffa, who stated:
[A] structure may be a ‘constructive total loss’ when it is damaged by a covered peril and, because of the extent of the damage, a state law or local ordinance requires demolition. In cases decided under VPLs in other states, courts have uniformly held that when demolition is legally mandated, the insured may recover as for a total loss.
This traditional view is found in the Wisconsin Supreme Court’s 1970 decision in Gambrell v. Campbellsport Mutual Insurance Company. 2 It is an example of how courts apply the doctrine of constructive total loss to protect policyholders.
The facts of that case found that Emmett and Pearlie Gambrell insured two buildings under a fire policy, with one of the structures insured for $7,500. After a fire severely damaged the rear building, the Milwaukee building inspection department concluded that the damage exceeded fifty percent of the building’s equalized value and ordered the structure razed.
Because the building could not legally be repaired, the Gambrells sought full recovery of the $7,500 policy limits. The insurer, however, argued that under a “rebuilding clause” in the policy, recovery was limited to a reduced amount unless the building was repaired or replaced, something the city had prohibited.
The Court’s Ruling In Favor of The Policyholders
The Wisconsin Supreme Court ruled in favor of the policyholders, holding that the city’s order to raze the building created a constructive total loss. The court made several important points. First, it noted that the building inspector’s determination that more than half the structure was destroyed was binding because the insurer never challenged the order through the available administrative process. The order was conclusive that the building could not be repaired. Second, the court emphasized Wisconsin’s valued policy law, which provides that when real property is wholly destroyed by fire, the insurer must pay the face value of the policy. That statute, rooted in public policy and on the books since 1874, overrides any conflicting contract provisions.
The court also explained that a municipal condemnation order is not the cause of the loss but rather a legal recognition that the loss is total. In other words, the fire damage, combined with the ordinance, left no option for repair, and the loss had to be treated as complete. The insurer’s reliance on the rebuilding clause failed because it conflicted with the valued policy law.
The company was deemed to have constructive notice of the ordinance prohibiting reconstruction of buildings damaged by more than fifty percent, and it could not escape liability by pointing to a clause that required repairs when the law itself made rebuilding impossible. The court made clear that contracts cannot alter or waive statutory protections grounded in public policy.
The Broader Lessons
The Gambrell case highlights several lessons for policyholders, those who advocate for them and those who make property claims decisions for insurers. A condemnation order following a fire can establish a constructive total loss as a matter of law, entitling the insured to full policy benefits. Insurers cannot enforce repair-based conditions when rebuilding is legally prohibited. Valued policy statutes are powerful protections that ensure insurers cannot collect premiums for a face amount of coverage while later attempting to pay less through contractual limitations. Perhaps most importantly, this case demonstrates that municipal orders do not increase insurer liability; they simply confirm the extent of the destruction already caused by the covered peril.
Why It Matters Today
For public adjusters and policyholders across the country, Gambrell serves as a reminder that the constructive total loss doctrine is designed to achieve fairness. It prevents insurers from exploiting technical clauses in situations where rebuilding is no longer a lawful option. It also illustrates how courts view valued policy laws not as optional, but as statutes written into every insurance policy by operation of law. The loss must be treated as total, and the insured is entitled to the full measure of coverage promised.
Tomorrow, I will analyze a more recent Wisconsin decision that came to a different conclusion.
Thought For The Day
“I’m a Wisconsin kid, so I like brats and burgers and stuff like that. Cheese curds.”
—J. J. Watt
1 John V. Garaffa, The Uncertain Scope of “Hurricane Damage” Under State Valued Policy Laws, 41 Tort Trial & Ins. Prac. L.J. 943, 953 (2006).
2 Gambrell v. Campbell Sport Mutual Ins. Co., 47 Wis.2d 483, 117 N.W.2d 313 (Wis. 1970).
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