Ryan Boysen | Law 360 | July 3, 2017
National insurance giants including State Farm, AIG, Allstate and a slew of others are staring down the barrel of an unconventional proposed class action in Connecticut that could cost them billions of dollars and will test the limits of the state’s insurance industry bad faith laws — all because of a mineral hardly anyone has ever heard of.
Pyrrhotite-contaminated concrete is the culprit behind a vast outbreak of crumbling basements and foundations currently sweeping eastern Connecticut. Fixing a crumbling basement or foundation can cost up to $250,000 per home and the problem is estimated to affect roughly 35,000 homes across eastern Connecticut.
The crisis threatens to crush the region’s real estate market and now it’s sucking in the state’s home insurers, as the massive liability goes unaddressed by both the state and federal government.
The proposed class action — which names all of Connecticut’s major property insurance carriers, roughly 30 in total — alleges the insurers were well aware of the problem before it exploded into the spotlight two years ago, and have been denying claims in bad faith in an attempt to wall themselves off from the crisis, one policyholder at a time.
It seeks to certify a class of all homeowners with crumbling foundations in three Connecticut counties and is asking for, among other things, a declaratory judgment that all of the insurers must cover repairs to all crumbling foundations in those counties, a provision one legal insurance blog termed a “Mega DJ” shortly after the suit was first filed last year.
“If the insurance companies continue to go down this path, it’s going to crush the middle class in eastern Connecticut,” Ryan Barry of Manchester-based Barry Barall & Spinella, who filed the suit, told Law360. “The whole thing is just crying out for a solution, and that’s what we’re trying to craft with this case.”
A “Massive, Unwieldy Class Action”
Since the crisis came to light in 2015 it’s become a contentious issue at every level of the state’s politics, with candidates for the 2018 governor’s race campaigning on it and state lawmakers deadlocked over a handful of hotly contested relief bills. Requests to the Federal Emergency Management Agency for aid have been denied, twice.
Given lawmakers’ inability to tackle the problem, it’s no surprise the courts have become the main source of relief for affected homeowners. Dozens of lawsuits against insurers who have denied crumbling concrete claims are pending in Connecticut state court right now, while a dozen or so have gone to district court.
Homeowners have prevailed in many of those district court suits, but thus far they’ve done little to address the problem as a whole, leaving plenty of room for a broader suit like Barry’s class action.
In addition to the declaratory judgment, the suit also seeks bad faith damages, and alleges the state’s insurers have a “general business practice” of denying claims in bad faith, in violation of the Connecticut Unfair Insurance Practices Act and the Connecticut Unfair Trade Practices Act. Those claims can result in substantial punitive damages, on top of the basic coverage sought by the declaration.
Every insurer Law360 contacted for this article declined to comment, except for Nationwide.
A spokesman told Law360 the company “is aware of the lawsuit” but “cannot discuss it.” However, he added that Nationwide “investigates each claim individually, applying the specific facts, laws, regulations and the purchased coverage to every claim decision.”
The insurers have come out against the suit with guns blazing, filing a flurry of individual and joint motions to dismiss in June, as well a joint motion to strike the class claims.
They argue the crumbling concrete issue is complicated and that coverage depends on the specifics of each policy and the damage to each foundation. Given the “fact-intensive investigation” needed to sort out each claim, a “massive, unwieldy class action” won’t fly, they say, in their joint motion to dismiss.
“Plaintiffs cannot improperly seek to have the court ignore the facts and the policy language in favor of an overarching, and inevitably inaccurate, declaration,” the motion says. “That such a broad declaratory judgment lumping all defendants together could possibly enter is wishful thinking.”
Barry counters that all class actions inevitably involve a group of plaintiffs with facts specific to each of them. The important thing, he says, is that his proposed class are all suffering from the same basic problem: Having paid their premiums for years, they’re now left without coverage just when they need it most.
“Everyone has homes with crumbling concrete and their insurance companies refuse to cover their claims,” he says. “So long as that suffering is at the center of our case, I look forward to our day in court.”
“Nothing Has Been Done”
The situation in Connecticut has been simmering since the 90’s, as isolated reports began to trickle in of homes whose basements and foundations were falling apart for no discernable reason.
When pyrrhotite oxidizes on contact with air and water, it expands. When the mineral is present in concrete, that expansion leads to cracking that can ultimately cause the concrete to collapse into rubble, a process that can take years or even decades to run its course.
And as Connecticut’s residents are now beginning to realize, a sizeable portion of all the foundations poured in the state since the 80’s contain pyrrhotite-contaminated concrete.
The crisis didn’t come into full view until 2015 however, when a series of local news reports catapulted the issue into the spotlight. Now, as property values and tax revenues continue to fall in the affected areas, resentment among homeowners has reached a fever pitch.
“Nothing has been done — the politicians have failed us,” Tim Heim, an affected homeowner who’s currently suing his insurer and has founded a grassroots organization around the issue, told Law360. “There have been a million proposals, and in the meantime we’re stuck over here grabbing our ankles.”
Heim owns a stately three-bedroom in Willington that’s typical of the houses in Connecticut’s northeastern Quiet Corner, a region that lies somewhere between rural and suburban. On paper, it may well be worthless however. Fixing a crumbling foundation — a complicated process that involves lifting the entire house up on stilts while the concrete below is demolished and repoured — can take months to complete and costs anywhere from $100,000 to $250,000, depending on the home.
For a blue-collar region where the median home price hovers around $245,000, according to Zillow, it’s a price that’s simply not payable by most homeowners, including Heim.
“This is my home, it’s my biggest investment,” Heim says. “When you learn that it’s worthless, it’s absolutely devastating. It’s an emotional roller coaster I wouldn’t wish on my worst enemy.”
“Broader Pattern Of Bad Faith”
The crux of Barry’s suit alleges Connecticut’s insurance carriers began to see the writing on the wall before most of the state’s residents did, sometime around the early 2000’s.
Since then they’ve used multiple tactics to build a legal firewall between them and the crumbling concrete crisis, the complaint says, like denying all claims outright regardless of their merit, and changing the language in their policies, all allegations the insurers vigorously dispute.
While the suit’s construction might be relatively untested, a dozen or so one-off crumbling concrete suits between homeowners and their insurers have gone to Connecticut district court thus far. Ten of those suits have survived motions to dismiss and a handful have survived summary judgment — many of them settling shortly thereafter — with one case being won by the plaintiff at trial.
The insurers have won outright in only three of those cases. In each one, the insurer’s victory rested on language in the policy at hand that qualified coverage for a “collapse” as applying only to a “sudden” or “abrupt” collapse.
Barry’s suit alleges the insurers inserted that language into policies specifically to delete coverage for crumbling concrete, without properly notifying policyholders or reducing premiums, meaning the language is null and void, but the issue is sure to be a major battleground as the suit goes forward.
Donna Tommelleo, a spokeswoman for the Connecticut Insurance Department, which must sign off on all policy language changes, says the department has “determined that the vast majority of carriers provided proper notification” and is “currently not aware of facts or circumstances to indicate that unfair practices have occurred.”
The suit’s most imposing claims ultimately rest on the insurers’ alleged practice of denying claims for crumbling foundations across the board.
“We’re trying to lay out the broader pattern of bad faith denial of claims that has only been hinted at in the other cases,” Barry says.
That allegation forms the basis of the CUTPA and CUIPA claims, and the Connecticut district court’s treatment of such claims in the one-off suits has evolved in a fairly one-sided direction over the past few years: in favor of homeowners, and against insurers.
In a 2009 ruling that dismissed CUTPA and CUIPA claims from the earliest crumbling concrete case, Bacewicz v. NGM Ins. Co., U.S. District Judge Janet C. Hall wrote that the plaintiffs “failed to allege the multiple violations necessary to support [those claims] … They have only alleged improper handling of their own, single claim.”
Compare that to Judge Hall’s ruling last year on the insurer’s motion to dismiss in another of those cases, Liston-Smith v. CSAA Fire & Casualty Insurance Co. The plaintiffs cited only state court suits in which CUTPA/CUIPA claims had survived motions to strike to support their own claims, but Judge Hall said those suits weren’t relevant, since the standards for motions to strike aren’t as strict as the federal standards that govern a motion to dismiss.
Even so, Judge Hall took the unusual step of taking judicial notice of the other crumbling concrete suits involving CSAA in district court — including the class action — to allow the plaintiff’s CUTPA/CUIPA claims to survive, essentially doing their work for them.
Many of the other suits filed within the last few years have routinely sailed through motions to dismiss and motions for summary judgment on bad faith and CUTPA/CUIPA claims, unless they involve policies with the sudden and abrupt language.
Ultimately, all of the crumbling concrete cases rest on the Connecticut Supreme Court’s 1987 ruling in Beach v. Middlesex Mutual Assurance Co. That case, which didn’t involve pyrrhotite-contaminated concrete, held that “collapse” is an ambiguous term in an insurance contract, and applies to any “substantial impairment of the structural integrity of a building,” even if the building is still uninhabitable.
The crumbling concrete cases have thrown into sharp relief the ambiguity of the phrase “substantial impairment” itself however, and U.S. District Judge Stefan R. Underhill now says in a crumbling concrete case he’s overseeing that he’s “strongly considering” certifying that term and others to the Connecticut Supreme Court for clarification.
“Billion Dollar Problem”
The pyrrhotite problem ultimately stems from a single quarry operated by J.J. Mottes, just down the road from Tim Heim’s house, according to a joint investigation between Connecticut’s Attorney General and its Department of Consumer Protection that concluded late last year. That quarry has provided the majority of the region’s concrete aggregate for the past 30 years, the report says, and it sits atop a large vein of pyrrhotite.
J.J. Mottes continues to dispute its role in the crisis, though it’s since shut down the quarry and sold it off. A company spokesman declined to comment for this story. A few years ago its office burned down, Connecticut’s Journal Inquirer reports, with the fire destroying all of its records.
One Connecticut resident, Linda Tofolowsky, sued J.J. Mottes in 1997 after her home’s foundation inexplicably began bulging and cracking a few years after it was poured. That suit was tossed in 2003 however, because she couldn’t prove that the problem stemmed from the concrete itself, which meant her claim was barred by the 10-year product liability statute of limitations.
Pyrrhotite was never mentioned in the suit, and Tofolowsky opened a complaint with the Department of Consumer Protection in 2003, only to see the agency close it two days later.
“They kept pouring more and more foundations with the same stuff,” Tofolowsky told Law360. “Nothing ever happened to them. If the state had moved on this sooner they could have prevented a billion-dollar problem.”