Connecticutt Class Action on Collapse Claims Faces Motion to Dismiss

Tred Eyerly | Insurance Law Hawaii | November 28, 2018

    The federal district court dismissed some insurers from a class action suit alleging failure to provide coverage for collapse claims. Halloran v. Harleysville Preferred Ins. Co., 2018 U.S. Dist. LEXIS 179807 (D. Conn. Oct. 19, 2018).

    A class of homeowners brought suit in 2016 against their homeowners insurance companies (“defendants”) for failure to cover collapse claims. Plaintiffs alleged they bought their homes between 1984 and 2015. Each of the homes had basement walls that were “crumbling and cracking due to the oxidation of certain minerals contained in the concrete.” As a result of the deteriorating concrete, plaintiffs claimed that their basement walls were in a state of collapse. 

    Plaintiffs alleged that the Insurance Services Office, Inc. (“ISO”) and the insurance companies were aware of the concrete issues in Connecticut at least as early as 1996, when claims began to be filed. Defendants and the ISO deliberately changed their policies’ definitions of “collapse” to try to avoid or minimize liability for potential claims brought by plaintiffs. The new language excluded losses to a foundation or retaining wall and “settling, cracking, shrinkage, bulging or expansion” from coverage of collapse. 

    The standard policy language produced by the ISO and adopted by the insurers went through several iterations between 1990 and the present. Originally, the coverage provided for the “direct physical loss to covered property involving collapse of a building  . . .”  The term “collapse” was undefined.

    In 1999, ISO language allegedly changed and defined collapse as “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 current intended purpose.” Further, a building “in danger of falling down or caving in” or that “is standing” is “not considered to be in a state of collapse.” Plaintiffs alleged that each defendant changed the language of their policies over time and that these changes attempted to delete coverage.

    The defendants moved to dismiss the fourth amended complaint. The court looked at specific policy language to determine whether the term “collapse” was ambiguous. The first set of claims submitted by plaintiffs arose under language adopted by the ISO in 1997. The policies provided for coverage of “direct physical loss to covered property involving collapse of a building or any party of a building” when the result of several different causes, such as “hidden decay,” “use of defective materials,” etc. Prior Connecticut cases had found the term “collapse” in these policies to be ambiguous. Plaintiffs with claims arising under the older policy language therefore properly alleged a “collapsed” that could be covered under the policies. 

    Plaintiffs who alleged that their policy included collapse provisions without temporal modifiers such as “abrupt” also survived a motion to dismiss because the policy language was sufficiently ambiguous.

    A second category of policies also included temporal modifiers, requiring the collapse to be “abrupt’ and the building to be unusable for its normally intended purposes. Still other policies required the collapse to be “sudden and accidental.” Under these policies, the “collapse” provision was not ambiguous, requiring a “sudden” collapse. The defendants’ motion to dismiss was granted as to these policies. 

    The third category of policies, over time, adopted more restrictive language. The motion to dismiss as to these policies was denied. There remained issues of fact and law as to whether the insurers were obligated to notify the insureds of changes in the policy definition of collapse and whether the insurers did so. 

    Defendants also moved to dismiss plaintiffs’ claims for breach of he implied covenant of good faith and fair dealing. Because several plaintiffs had not pled a plausible claim for breach of contract, their claims for breach of the implied covenant of good faith and fair dealing also failed. For plaintiffs who survived dismissal of their breach of contract claims, however, the motion to dismiss the breach of the implied covenant of good faith and fair dealing was denied. Plaintiffs alleged that defendants knew that plaintiffs’ claims were covered. Further, defendants misled plaintiffs in order to receive their premiums without providing the requisite coverage. 

    Finally, the arguments of certain defendants to strike the class allegations was denied. The issues would be better addressed when the motion for class certification was considered, after more development of the record in the case.

Trial Court Sides with Insurers Over Cracked Concrete Foundation

Jason Cleri | Property Insurance Coverage Law Blog | December 15, 2018

In March of 2017, I wrote a blog post about the crumbling foundations in Connecticut due to a concrete company, J.J. Mottes & Company, using concrete that contained pyrrhotite, that cause the concrete to lose integrity and collapse. Many insurance companies have been denying these claims for various reasons. One insured, Lawrence and Karen Cockill, sought to have their claim against Nationwide covered by arguing that the structural integrity of the concrete was diminished due to a “chemical reaction.”1

Nationwide denied coverage citing to the policy provision that stated:

We do not cover loss to property described in Coverages A and B resulting directly from any of the following. . . .

(f)(1) wear and tear, marring, deterioration

(2) inherent vice, latent defect, mechanical breakdown;

(3) smog, rust. . . .

(5) release, discharge, or dispersal of contaminants or pollutants;

(6) settling, cracking, shrinking, bulging or expansion of pavements, patios, foundations, walls, floors, roofs or ceilings.

In ultimately ruling for Nationwide and granting their motion to dismiss, the District Court reasoned that “although loss from ‘chemical reaction’ was not specifically listed among the exclusions in the policy…many of the exclusions were broad enough to include chemical reactions.” For example, “wear and tear,” “deterioration,” “inherent vice,” “latent defect,” “rust,” and “cracking” all were terms “that may encompass the ‘chemical reaction’ ” described.

The trial court also noted that the only manifestation of the loss that the insured observed was “cracking in the basement walls,” but that loss from cracking was excluded under the policy’s “collapse” provision.

I leave you with a quote from Hall of Famer Connie Mack, who said: “Humanity is the keystone that holds nations and men together. When that collapses, the whole structure crumbles. This is true of baseball teams as any other pursuit in life.” Unfortunately, it doesn’t seem that humanity can help the Cockill’s pay for their crumbling foundation.
____________________________
1 Cockill v. Nationwide Property and Casualty Ins. Co., No. 3:18-cv-254 (D. Conn. Nov. 27, 2018).

“Abrupt Falling Down of Building or Part of Building” as Definition of Collapse Found Ambiguous

Tred R. Eyerly | Insurance Law Hawaii | October 10, 2018

The federal district court predicted the California Supreme Court would find the definition of collapse, calling for the abrupt falling down or caving in of a building or part of a building, to be ambiguous. Hoban v. Nova Cas. Co., 2018 U.S. Dist. LEXIS 139116 (N.D. Cal. Aug. 15, 2018).

The insureds’ bowling center had two roof trusses that helped support the roof. The truss failures caused the building ceiling, overhead monitors, and disco ball to drop approximately six to ten inches, and also caused ceiling tiles and a layer of insulation to fall from the ceiling. A general contractor, named Tom Powers, and the county building inspector inspected the damage. The building inspector immediately ordered the business closed until necessary repairs could be completed. Powers was hired to shore up the roof support system to prevent a complete collapse. Thereafter, the insureds were able to re-open the bowling alley.

The insureds’ policy with Nova covered an abrupt collapse. This was defined as the 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 could not be occupied for its intended purpose. After hiring a structural engineer, Nova denied coverage, deciding the roof did not collapse and the building was still standing.

The insureds sued and motions for summary judgment were filed by both parties. There were no California cases interpreting the exact language of the policy on collapse. The court therefore determined that the policy language was ambiguous because there was more than one reasonable interpretation of its intended meaning. One reasonable meaning of “caving in” was Nova’s understanding that the building must completely collapse to the ground. However, a building could “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 did not completely collapse to the ground.

Further, coverage that applied to the “abrupt” collapse of either “a building” or “any part of a building”  suggested the policy was intended to cover a partial collapse of part of the building, so long as it occurred abruptly, not only a total or complete collapse. Moreover, specifying that the collapse must render the building or part of the building so that it “cannot be occupied for its intended purpose” would be unnecessary and redundant if the policy required the building or any part of a building to have collapsed to the ground.

Because the policy language was ambiguous, California law required it be interpreted in favor of the insured. Therefore, the court granted the insureds’ motion for summary judgment.

Nova also moved for summary judgment on the insureds’ claim for breach of the covenant of good faith and fair dealing. The court granted Nova’s motion because its decision that there was no coverage for collapse was based on a genuine dispute about coverage.

Court Upholds Denial of Collapse Coverage Where Building Still Stands

Tred R. Eyerly | Insurance Law Hawaii | August 29, 2018

The Michigan Court of Appeals affirmed the trial court’s decision finding the policy’s collapse coverage did not apply. Cmty. Garage v. Auto-Owners Ins. Co., 2018 Mich. App. LEXIS 2680 (Mich. Ct. App. June 19, 2018).

The insured operated a truck repair business. In June 2016, the insured’s place of business sustained damage due to failure of several trusses providing structural support to the building’s roof. The failure was due to latent construction defects leading to an insufficient load bearing capacity. The roof began to sag while one of the walls bulged outward due to the sudden pressure overload. The insured hired a construction firm to install temporary shoring to support the roof and prevent further damage. All of the building’s walls remained standing and, although the roof sagged, it also remained intact. However, the building could not be safely occupied until repairs were completed.

The insured submitted a claim to Auto-Owners under a property casualty and liability policy. Collapse was covered under the Additional Coverage section of the policy. But the policy required the collapse to be “abrupt.” meaning an abrupt falling down or caving in of a building or any part of a building, rendering the building unfit for its intended purpose. The claim was denied on the ground that the damage was not a covered “collapse” under the terms of the policy.

The insured sued and cross motions for summary judgment were filed. The trial court concluded that the building had neither fallen down nor caved in, as it was still standing. Therefore, there was no collapse.

The appellate court affirmed. Although one of the walls of the building bulged outward and the roof sagged, they nonetheless remained intact. While the roof may have been in imminent danger of caving in were the shoring to be removed, the policy excluded from coverage any part of a building that was simply in danger of falling down or caving in.

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.