Sierra Pacific Power Co. v. Hartford Steam Boiler Inspection & Insurance

ORDER

On New Year’s Day, 1997, the Truckee River in the Sierra Nevada Mountains flooded. The flood destroyed the Farad Dam, which was owned by plaintiff Sierra Pacific Power Co. (“Sierra”), and used in connection with its hydroelectric facility in Farad, California. Insurers Hartford Steam Boiler Inspection & Insurance Co. (“Hartford”) and Zurich American Insurance Co. (“Zurich”) (together “Insurers”) insured Sierra’s facilities, including the Farad Dam, with $200 million in total coverage.

In this coverage dispute, a primary issue is whether, as a matter of California insurance law, the building ordinance or law exclusion excludes increased costs of replacement due to building ordinances following a loss caused by a covered peril. If it does exclude such costs, a secondary issue is whether, again as a matter of California insurance law, other costs that are prerequisites to building, such as costs of obtaining permits and environmental impact studies, are excluded by the building ordinance or law exclusion. The California Supreme Court has not ruled on these questions, and the California Courts of Appeal have reached conflicting conclusions. As these questions are dispositive…