The issue in this case was whether two insurers were required to pay in excess of $200,000 in costs of rebuilding a school building to code under identical policies with replacement cost provisions. The building had been destroyed by fire and the insurers paid $3 1/2 million for its replacement, but refused payment of the costs necessitated by building code upgrades made since the original construction of the school building.

The school board appealed a trial court judgment in favor of the insurers, based solely on the civil authority exclusion in the policies. The Alaska Supreme Court noted the civil authority clause in the policies, in pertinent part as follows:

"The policy does not insure against loss or increased cost occasioned by any Civil Authority's enforcement of any ordinance or law regulating the reconstruction, repair or demolition of any property insured hereunder." Similar exclusionary language was included in the insuring agreement and replacement cost provisions of the policies. The school district argued that the replacement cost provisions of its policies were intended to pay the cost of reconstruction "....so that the new building would be able to replace in function the building which was destroyed." It said that it reasonably expected its insurance to fully cover the cost of replacing a building that was destroyed.

The Alaska Supreme Court said, quoting Appleman, Insurance Law and Practice, that insurance contracts "....will be construed according to the principle of reasonable expectations." Quoting Robert Xeeton, Basic Text on Insurance Law, the court said that the reasonable expectations doctrine holds that "....the objectively reasonable expectations of applicants and intended beneficiaries regarding the terms of insurance policies will be honored even though painstaking study of the policy provisions would have negated those expectations. "The insured further argued that fire, not the building codes, caused the increased costs. It contended that the pertinent group of exclusions applied "....only when the loss is solely caused by enforcement of an ordinance, and not when a covered event such as a fire triggers enforcement"

Citing precedent for that argument and, especially, the application of the "reasonable expectations" principle, the court, with dissenting opinion, concluded that the increased replacement costs caused by building code upgrade requirements were covered by the policies. The judgment of the trial court was reversed in favor of the insured school district and against the insurance companies.

(BERING STRAIT SCHOOL DISTRICT, Appellant v. RLI INS. CO. ET AL, Appellees. Alaska Supreme Court. No. S-5300. May 20, 1994. CCH 1994 Fire and Casualty Cases, Paragraph 4799.)