Ambiguous Grant Of Collapse Coverage Construed In Policyholder’s Favor

Richard Wolf | Claims Journal | August 27, 2018

Invoking the familiar insurance contract interpretation doctrine of California and other jurisdictions, that truly ambiguous policy wording must be construed against the insurer drafting it, the U.S. District Court for the Eastern District of California decided on August 16, 2018 that coverage for “abrupt collapse” of a building was not limited to losses where the insured building has fallen to the ground. Rather, it includes situations where the building ceiling and its attached equipment have dropped nearly a foot in height, and ceiling tiles and a layer of insultation have fallen onto furnishings below.

The decision, Hoban v. Nova Cas. Co., is reported at 2018 U.S. Dist. LEXIS 139116, and involved the failure of two trusses supporting the roof of a bowling alley in Madera, California. These failures caused the ceiling of the building to drop approximately 6 to 10 inches below its as-built elevation, resulting in the Madera County government immediately ordering the business closed for public safety reasons until repairs could be made.

The bowling alley owners, plaintiffs Patti and Terry Hoban, were insured by a commercial insurance policy issued by defendant Nova Casualty Company. In ruling on cross-motions for summary judgment, the court stated that, while damages caused by collapse are typically excluded from insurance coverage, plaintiffs purchased “additional” coverage specifically to provide protection in the event of collapse. The key to the grant of collapse coverage, found in an endorsement titled “Additional Coverage – – Collapse,” was that it applied only to an “abrupt collapse as described and limited in” the endorsement. The endorsement, in turn, defined the phrase “abrupt collapse” as meaning “an abrupt falling down or caving in of a building or any part of a building with the result that the building or part of the building cannot be occupied for its intended purpose.”

The endorsement adding collapse coverage explicitly stated that it did not apply to a building, or any part of one, in danger of falling down or caving in, or to a part of a building still standing after a loss, even if it has separated from another part of the building, and even if the building shows evidence of cracking, bulging, sagging, bending, leaning, settling, shrinkage or expansion.

After investigating the cause of loss, the insurer retained a lawyer to provide it with a coverage analysis. The lawyer told the insurer that the policy’s collapse coverage did not apply to plaintiffs’ loss because the roof had not collapsed. The insurer denied the insurance claim, asserting that because the ceiling and roof of the building had not fallen down there had been no collapse. Therefore, the insurer contended that the collapse coverage did not apply at all to plaintiffs’ loss. The same argument found its way into the insurer’s motion for summary judgment, and in defense of plaintiff’s cross-motion for the same relief. In brief, the insurer argued that the additional coverage provision for collapse did not apply in this case because the insured building still stood and had not fallen to the ground.

The court noted that in a diversity of citizenship case such as this one applying California law, the court’s role in construing the insurance contract is to discern how the California Supreme Court would apply the “abrupt collapse” definition to the essentially undisputed facts of the loss. If the state’s highest court had not adjudicated the issue, a federal court must make a reasonable determination of the result the highest state court would reach if it were deciding the case.

Although the California courts have litigated collapse insurance coverage issues with some frequency, creating a split in authority, the extent of collapse coverage, the court noted, depends on the precise policy language, so cases interpreting collapse provisions with language different from the policy in this case, or that leave the term “collapse” undefined, were of limited utility in aiding this court to make a decision.

Accordingly, the court resorted to the general principles of insurance policy interpretation under California law, starting with the rule requiring a court, first, to resort to the language of the contract in order to ascertain its plain meaning or the meaning a lay person would ordinarily attach to it, making it consistent with a policyholder’s reasonable expectations. The goal in construing an insurance policy is to give effect to the parties’ mutual intention, and the terms of a contract are ambiguous if they are susceptible of more than one reasonable interpretation. Contract language must be interpreted as a whole and as applied to the factual circumstances of the case. The contract terms must not be found ambiguous in the abstract. Most importantly in this case, ambiguities in coverage provisions interpreted by California courts are construed against the insurance company.

The court concluded that the language of this policy was ambiguous because there was more than one reasonable interpretation of its intended meaning regarding collapse. One reasonable meaning of the phrase “caving in,” the court said, “is defendant’s understanding: that the building has completely collapsed to the ground.” The court noted that the policy did “attempt to differentiate between a building that has suffered an ‘abrupt collapse’ and one that is standing.” This suggests, the court stated, that even though the policy does not unambiguously require it, the building or part of the building must collapse completely to the ground for coverage to exist.

The court pointed out that in common parlance a building can “cav[e] in . . . with the result that the building . . . cannot be occupied for its intended purpose . . . by having its roof or ceiling fall an appreciable distance, even if the building as a whole has not completely collapsed to the ground.” As put another way by the court, [n]othing in the policy unambiguously informs the policyholder that, to be covered, the building or a part of it must fall completely to the ground.

The court carefully examined the insurer’s word choice in order to shed light on whether to suffer a collapse the insured building must completely fall down or flatten. The crucial phrase used in the policy is “abrupt collapse,” which the court observed highlights the manner in which the collapse must occur to warrant coverage. By contrast to this “temporal element,” the policy did not use the term “complete collapse,” which would refer the reader to the degree of collapse required for coverage. With coverage applying to the “abrupt” collapse of either “a building” or “any part of a building” the court thought the policy wording strongly suggested the policy was intended to cover a partial collapse of a part of a building, so long as it occurred abruptly, “not only total or complete collapse.”

In a related use of word logic, the court observed that “specifying that the collapse must render the building or part of the building so that it ‘cannot be occupied for its intended purpose’ [is language] that would be unnecessary and redundant if the policy required the building or part of the building to have collapsed to the ground. A building or a part of building that has collapsed to the ground cannot be occupied for any purpose, or at all, let alone for its intended purpose, so to require collapse to the ground would render the actual policy wording – that the collapsed building cannot be occupied for its intended purpose – to be mere surplusage. “[C]ontracts, the court said, are usually interpreted to avoid [such] redundancy.”

The court recited evidence establishing the predicate for coverage based upon the partial collapse of features of the building. The court noted that it was undisputed that the overhead monitors of the bowling alley fell 6 to 10 inches in elevation, and that ceiling tiles and insulation fell to the table tops and counters below. The court stated, “These constitute “any part of a building” that has “fall[en] down.” It was also undisputed that the business was closed at the order of the County of Madera for public safety reasons until repairs could be completed, so neither the building nor any part of it could be occupied for its intended purpose. Accordingly, the court held, there is no genuine dispute of material fact about whether a part of the building fell down and whether the building could be occupied for its intended purpose. Finally, based upon the policy language stating that coverage does not extend to parts of building understanding “even if it shows evidence of cracking, bulging, sagging, pending, leaning, settling, shrinkage or expansion,” the court found that this language could be reasonably understood as intending to exclude coverage for any regular maintenance costs, and not as requiring a complete collapse for coverage to exist. To rule otherwise, the court said, would transform the policy into a maintenance agreement. Here the building was in a state of collapse, well beyond the point at which ordinary maintenance would be called for.

Plaintiffs sued their insurer for not only breach of contract, but also for breach of the implied covenant of good faith and fair dealing, but this claim was rejected based on the genuine dispute doctrine. This doctrine holds that where there is a genuine dispute over coverage, or the amount of loss, an insurer’s denial of benefits gives rise to tort damages only if the insured shows the denial or delay was unreasonable. As a corollary of that principle, California courts hold that a genuine dispute exists only where the insurer’s position is maintained in good faith and on reasonable grounds. Here it was found that it was undisputed that the building did not completely collapse to the ground, which under the insurer’s interpretation would mean there was no coverage under the policy.

Plaintiffs contended the genuine dispute doctrine did not excuse the insurer’s claim denial because it formed its view of coverage at the outset of the claims process for conducting an investigation, that is not relevant, even if it were true. It is undisputed that the building did not fall to the ground and nothing about the investigation would or could have impacted a coverage decision based on defendant’s interpretation of the policy. While defendant’s policy interpretation ultimately proved to be incorrect, given the ambiguity of the contract and the manner in which California law requires such ambiguity to be construed, accordingly, the court held that defendant insurer was entitled to summary judgment in its favor as to the plaintiffs’ bad faith claim.

Developers Sometimes Draft Documents For Their Own Benefit

Daniel Miske | Husch Blackwell LLP | August 29, 2018

A Court in Colorado recently dealt with a developer who placed a provision in the declaration of a condominium association prohibiting amendment of the declaration – ever – without the declarant’s written consent, and requiring that all construction defect claims be resolved through arbitration (Vallagio at Inverness Residential Condominium Association, Inc. v. Metropolitan Homes, Inc. (395 P.3d 788)).

The Association subsequently presented the developer with construction defect claims, and amended their declaration – without the declarant’s consent – to remove the binding arbitration provision. The Association argued that the requirement that the declarant approve any declaration change was void because it violated the state’s condominium laws, which only required a certain percentage of owners to approve a declaration change.

The Colorado supreme court ruled in favor of the declarant, holding that the declarant’s restriction on amending the declaration – despite its restrictiveness – did not contradict or run afoul of state law. It further held that because the Association did not acquire the declarant’s consent, its amendment to the declaration was void.

Lesson. Developers draft documents to benefit the developer.  While the law places limits on this “power,” it’s important that your Association comply with its governing documents and the law.

Rights, Remedies and Procedures for Addressing Construction Defect Claims in Florida

Scott Topolski | Cole Schotz | August 16, 2018

Florida has implemented a rather simple statutory scheme to address claims that a real property owner believes she may have against a contractor, subcontractor, supplier or design professional for construction defects on her property—whether those defects involve construction, repairs, remodeling or alterations to the property.  The law, Florida Statutes Sections 558.001-005, attempts to strike a balance between protecting the rights of property owners and reducing the litigation associated with such claims.

In a nutshell, before a property owner files a lawsuit in court or a demand for arbitration, to the extent arbitration is required, she must first, at least 60 days (120 days if the action involves an association that represents more than 20 parcels) prior to filing that lawsuit or demand for arbitration, serve a written notice of her claim on the contractor, subcontractor, supplier or design professional whom she claims is responsible for the defects.  Defects encompass a number of different deficiencies arising from defective materials, components and products; violations of applicable codes; failure of a design professional to comply with applicable standards; or a failure to build or remodel property consistent with accepted trade standards.

The 60-day pre-suit notice must describe in detail each and every construction defect that the owner believes exists, as well as all known damages resulting from the defects and the location of each defect.  Within 30 days of service of the owner’s notice of claim, the contractor, subcontractor, supplier or design professional to whom the notice is directed is entitled to inspect the property in order to assess each defect.  If the contractor, subcontractor, supplier or design professional determines that destructive testing is necessary to determine the nature of the alleged defects and what caused those defects, there are certain other notice rights and obligations associated with that destructive testing, including the right of the owner to object under Florida Statutes Sec. 558.004.

Within 45 days after service of the property owner’s notice of claim, the contractor, subcontractor, supplier or design professional served with that notice is required to serve a written response which must provide for one of the following:

  • an offer to remedy the defect, at no cost to the owner, with a detailed description of the necessary repairs and the timetable for completion;
  • an offer to settle the claim by a payment of money;
  • a hybrid, for lack of a better term, offer to settle the claim by a combination of repairs and a monetary payment, with, again a description of the required repairs and the timetable to complete those repairs;
  • a statement that the claim is disputed and that there will be no attempt to remedy the alleged defect or settle the claim;
  • a statement that any monetary payment will be determined by the contractor’s, subcontractor’s, supplier’s or design professional’s insurance company within 30 days after the insurance company is notified of the claim. This statement may include an offer under paragraph c.) contingent upon the owner accepting the carrier’s determination whether to make an additional payment of money.

An owner who receives a settlement offer must serve a written notice of acceptance or rejection within 45 days after receiving that offer.  If the contractor, subcontractor, supplier of design professional either disputes the owner’s notice of claim or does not respond to it, the owner can, without any further notice, file a lawsuit or demand for arbitration, where applicable.

If a contractor, subcontractor, supplier or design professional is sued for alleged construction defects without the owner first providing any pre-suit notice, that contractor, subcontractor, supplier or design professional should immediately move to stay the lawsuit under Florida Statutes Sec. 558.003

Insurer’s Summary Judgment Motion to Reject Claim for Construction Defects Upheld

Tred R. Eyerly | Insurance Law Hawaii | July 23, 2018

The Third Circuit upheld the district court’s order granting summary judgment in favor of the insurer on a claim seeking coverage for construction defects. Lenick Constr. v. Selective Way Ins. Co., 2018 U.S. App. LEXIS 15197 (3d Cir. June 6, 2018).

Westrum was the general contractor for a 92 unit development, and it subcontracted with Lenick to perform rough and finish carpentry and to install paneling, windows, and doors provided by the developer. After the project was completed, it was discovered that some units experienced water infiltration, leaks and cracked drywall.

The condominium development sued Westrum, alleging contract and warranty claims. Westrum impleaded Lenick, asserting claims for breach of contract and indemnification. Lenick sought a defense from its insurer, Selective. Selective defended under a reservation of rights.

Lenick then sued for a declaratory judgment that Selective was obligated to defend and indemnify. The parties filed cross-motions for summary judgment. The district court found that the allegations in the underlying case against Lenick were not covered and Selective had no duty to defend or indemnify.

On appeal, Lenick argued that under Pennsylvania law, the damage occurred to areas of the property on which Lenick did not work, invoking coverage. The court disagreed. Damages that were a reasonably foreseeable result of faulty workmanship were not covered, even when damages occurred to areas outside the work provided by the insured.

Lenick also argued that the property damage was caused by defects in the materials provided to it by the developer. But this theory was not supported by the underlying pleadings, only by extrinsic evidence. Because the pleadings did not contain allegations sufficient to support a claim that the windows, doors, and/or panels used by Lenick malfunctioned, causing the property damage to the project, the argument for coverage failed.

The district court’s granting of summary judgment to Selective was affirmed.

Court Finds AIA Subrogation Waiver Inapplicable; Appeal Pending

Geoffrey M. Waguespack | Butler Weihmuller Katz Craig

In Liberty Mutual Fire Insurance Co. v. Fowlkes Plumbing LLC, 17-cv-010-GHD-DAS, 2018 WL 842169 (N.D. Miss. Feb. 12, 2018), the District Court for the Northern District of Mississippi held that the subrogation waiver of Section 11.3.7 of AIA Document A201-2007 bars recovery for damages to property associated with a window restoration project that compromises the “Work” only.  The Court granted in part and denied in part the defendant’s motion for summary judgment.

In May 2015, Chickasaw County School District contracted with Sullivan Enterprises to perform window restoration work at a school district building.  While construction work was being performed, a fire consumed the entire building.  The School District made a claim against its insurance policy held by Liberty Mutual, under which Liberty Mutual paid $4.3 million dollars for damages caused to the building.  Liberty Mutual then brought a subrogation action against the contractors alleging that their negligence started the fire.

The relevant agreement between the school district and its contractors incorporated by reference AIA Document A201-2007, General Conditions of the Construction Contract, which contained a subrogation waiver.  The waiver stated that the “Owner” and the “Contractor” waived:

[A]ll rights against each other … and any of their subcontractors … for damages caused by fire … to the extent covered by property insurance obtained pursuant to this Section 11.3 or any other property insurance applicable to the [window restoration work].

Section 11.3 mandated that the “Owner” purchase and maintain “property insurance written on a builder’s risk all-risk or equivalent policy form,” and that the “insurance shall include interest of the Owner, the Contractor, Subcontractors and Sub-subcontractors in the Project.”

The issue before the Court was the scope of the subrogation waiver in Document A201-2007.  In particular, the parties presented two questions to the Court.  First, whether the phrase “to the extent covered by property insurance obtained pursuant to this Section 11.3” means any insurance used to satisfy the owner’s obligation under Section 11.3.1.  Second, whether “any other property insurance applicable to the [window restoration work]” means any claims paid out on a policy that covered the Work or only claims for the Work itself.

The Court recognized that two approaches have been taken across the country in determining the scope of the waiver.  One approach makes a distinction between “Work” and “non-Work” property limiting the scope of the waiver to damages to the “Work.” A second approach does not focus on that distinction but rather limits the waiver’s scope to the proceeds of the insurance provided under the contract. In other words, the first approach defines the scope of the waiver by the type of property that was damaged, while the second approach defines the scope of the waiver by the insurance source of the proceeds. Under the second approach, if the proceeds were paid from the policy provided by the owner pursuant to Section 11.2.1, then they would be covered by the waiver.

The Court noted that the Fifth Circuit has followed the first approach, but noted that the second approach was more appropriate for this case. The Court stated that the insurance policy at issue was most appropriately compared to the second approach because there was no evidence that it was purchased specifically to cover the Work or that it includes any interests of the contractors and subcontractors. The Court, therefore, found that the waiver of subrogation provision found in Document A201-2007 applies only to claims for damages to the Work itself and not to non-work property.  The Court, therefore, denied the motion for summary judgment and allow Liberty Mutual’s claim to continue as to the non-Work property only.

The case was certified for interlocutory appeal to the 5th Circuit Court of Appeals.  We will continue to monitor this issue. Stay tuned.