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.

Connecticut Supreme Court Again Asked to Determine the Meaning of Collapse

Tred R. Eyerly | Insurance Law Hawaii | July 25, 2018

Faced with a series of policies, earlier ones which did not define collapse, newer policies which did, the court determined there was a possibility of coverage under the older policies which did not define collapse. Vera v. Liberty Mut. Fire Ins. Co., 2018 U.S. Dist. LEXIS 100548 (D. Conn. June 15, 2018).

Connecticut courts have faced a rash of collapse cases as a result of cement provided to build house foundations by J.J. Mottes Concrete Co. Many basement foundations built with the concrete have shown cracking and other signs of premature deterioration.

Here, plaintiffs noticed cracking in their basement. Their expert, William Neal, found “spider web cracking” and several vertical external cracks. But the house did not show any signs of falling down. The expert believed the cement was the cause of the cracks. Mr. Neal recommended replacing the basement walls.

Plaintiffs submitted a claim to Liberty. Liberty sent an inspector to the home. After the inspection, the claim was denied because the cracking was due to faulty, inadequate or defective materials along with settling.

The policy covered collapse as follows:

8. Collapse. We insure for direct physical loss to covered property involving collapse of a building or any part of a building caused only be one or more of the following . . .

b. Hidden decay

The policy had exclusions for faulty, inadequate or defective design, workmanship, construction, etc.

In a prior case, the Connecticut Supreme Court defined collapse as the  “substantial impairment of structural integrity” of a building or any part of a building. Beach v. Middlesex Mut. Assur. Co.,, 532 A. 2d 1297, 1300 (Conn 1987). Since Beach, no Connecticut appellate court had explained what “substantial impairment of structural integrity” meant. It was not clear how “substantial” an impairment needed to be to constitute “collapse.”

Therefore, the court certified the following question to the Connecticut Supreme Court:

What constitutes a “substantial impairment of structural integrity” for purposes of applying the “collapse” provisions of this homeowners’ insurance policy?

The same question was previously certified to the Connecticut Supreme Court by Judge Underhill, another Federal District Court Judge from the District of Connecticut [post here].

Can Appraisal Take Place Over Property That Has Been Demolished?

Erin Dunnavant | Property Insurance Coverage Law Blog | August 7, 2018

Florida’s Federal Middle District believes it can.1 After Hurricane Irma struck its commercial building in Port Charlotte, Florida, building owners Etcetera, Etc, Inc., filed an insurance claim under their policy with Evanston Insurance Company (“Evanston”). Evanston began its investigation, and as that was underway Charlotte County also inspected the building and issued a “Notice of Unsafe Building” stating the building “was in danger of collapse.”

The County’s notice gave the building owners (“the insureds”) two options: they could either repair or demolish their building. If they chose repairing it, they had to secure all necessary permits and commence the work within 30 days, complying with all applicable building codes. If they opted to demolish the building, they had to secure all permits associated with demolition, including debris removal and complete the demolition within 30 days. If the insureds failed to comply with either option, the County would demolish the building after the 30 days lapsed. The insureds opted to demolish the building.

After receiving a copy of the County’s Notice, Evanston Insurance Company sent a letter to its insureds stating that it did not believe the property needed to be demolished, and that in fact, the County’s notice made it clear that the property could be repaired. Evanston also hired an engineer who agreed the building could be repaired instead of demolished. Evanston further told its insureds that any decision to demolish the property would be voluntary and would not be related to a covered loss. The insureds responded to Evanston acknowledging that although there was some pre-existing damage, Hurricane Irma had caused more damage making it a “total loss.” The letter also notified Evanston that if they wanted to re-inspect the insureds’ building, they needed to do so right away, as the demolition would occur within the next few weeks.

At first, Evanston responded to its insureds by stating it would re-open the claim and schedule a re-inspection to occur. Nonetheless, less than a week before the re-inspection was scheduled, the insureds received correspondence from Evanston Insurance Company that although it acknowledged some covered damage, it was still their position that the property could be repaired (and did not need to be demolished), and for an amount that fell below the windstorm and hail deductible. Accordingly, Evanston did not make payment, but instead told its insureds to submit a repair estimate if it disagreed with Evanston’s position. Instead of awaiting an estimate or continuing to negotiate, Evanston Insurance Company filed a Complaint for Declaratory Judgment against its insureds asking the court to find that,

  • The insured property was not a total loss;
  • Florida’s Valued Policy Law did not apply to the Policy;
  • loss or damage caused by the enforcement of an ordinance or law (1) regulating the construction, use, or repair of any property; or (2) requiring the tearing down of any property, including the cost of removing its debris, was excluded; and
  • liability for the loss was limited to any covered damage caused by Hurricane Irma, subject to the Policy deductible and other terms and conditions.

The Defendant-insureds timely answered the complaint. They also sent a request for appraisal to Evanston. The policy here had an appraisal clause similar to many policies; it stated in pertinent part:

Appraisal

If we and you disagree on the value of the property or the amount of loss, either may make written demand for an appraisal of the loss, either may make written demand for an appraisal of the loss. In this event, each party will select a competent and impartial appraiser. The two appraisers will select an umpire. If they cannot agree, either may request that selection be made by a judge of a court having jurisdiction.

Evanston Insurance Company never responded to Defendant-insureds request for appraisal, so the insureds filed a Motion to Compel Appraisal with the court. In determining whether to grant the motion, the court compared situations where insurance carriers deny coverage to those where they acknowledge it,

[While] a dispute regarding a policy’s coverage for a loss is exclusively a judicial question . . . . when an insurer acknowledges that there is a covered loss, any dispute regarding the amount of such loss is appropriate for appraisal. Notably, in evaluating the amount of the loss, an appraiser is necessarily tasked with determining both the extent of covered damage and the amount to be paid for repairs.2

The court found that the question of what repairs are needed to restore a property is a question relating to the amount of loss and not coverage. Evanston acknowledged coverage for the damages relating to Irma, but believed they fell under the deductible, while the insureds believed the damages amounted to a “total loss.” The court found that because both parties agreed there was at least some damage due to a covered cause of loss, the remaining dispute over the scope of damage was appropriate for appraisal.

Evanston Insurance Company argued that the Defendant-insureds waived their right to go to appraisal by demolishing the building, making appraisal impossible. Although there is not much in the way of authority on this issue under Florida law (as the court acknowledged), the court did not find waiver here. The court noted these facts to supports its position:

  • Evanston had inspected the condition of the [insureds’] building 30 days prior to Hurricane Irma;
  • Evanston’s adjusters and engineers inspected again following the hurricane;
  • Evanston was given the opportunity to inspect the building prior to the demolition;

These facts outweighed Evanston’s argument that it would be impossible to appraise the property, especially when reports and estimates generated prior to demolition could be relied upon.

Although Evanston Insurance Company was unsuccessful in fighting off appraisal, the court granted its request to have the appraisal panel prepare a detailed line-itemed appraisal award that should include: 1) the actual cost value of all damages at the property prior to demolition, 2) damages resulting from the enforcement of an ordinance or law regulating construction, use, repair, tear-down or debris removal, 3) the actual cash value of covered damages that existed prior to demolition and are directly attributable to Hurricane Irma, and 4) Damages that predated the policy period, to include damages related to Hurricane Charley.

This is an important case for policyholders because it shows how important cooperating with your insurance company can be. For instance, had the insureds not permitted the initial inspection by the insurance company, the court may have come to a different conclusion, as there may have been insufficient evidence for which to conduct an appraisal without those visits. When in doubt, cooperate with your insurance company. If you aren’t sure what that entails, consult with a public adjuster or an experienced policyholder attorney.
_______________________
1 Evanston Ins. Co. v. Etcetera, Etc Inc., 2:18CV103FTM99MRM, 2018 WL 3526672 (M.D. Fla. July 23, 2018).
2 Id. at *3 (citations omitted; emphasis in original).

When the Insurance Company Labels Your Loss a Collapse, Can It Still Deny Your Collapse Claim?

Nicole Vinson | Property Insurance Coverage Law Blog | June 28, 2018

At least one Michigan court has ruled that even when the execute general adjuster calls a building’s damage a collapse and labels it as a “cave in,” the denial will stand where the policy language supports an exclusion.1 This case arises out damages that occurred to a large commercial shop that repairs commercial trucks. There was a failure of the trusses and the roof began to sag, causing one of the walls to bulge outward due to the sudden pressure. Following the policy’s duty to mitigate the loss, the insured retained a company to install temporary shoring to support the roof and prevent further damage.

Community Garage made a claim with Auto-Owners for collapse and agreed the building could not be safely operated until repairs were made.

The policy Auto-Owners provided Community Garage excluded collapse coverage but provided “Additional Coverage – Collapse.” Under this coverage the policy required the collapse to be abrupt: “Abrupt collapse means 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 policy goes on to explain Additional Collapse coverage does not apply to something that is nearly a collapse.

Here is the exact policy language:

D. Additional Coverage- Collapse

3. This Additional Coverage- Collapse does not apply to:

a. A building or any part of a building that is in danger of falling down or caving in;

b. A part of a building that is standing even if it has separated from another part of the building; or

c. A building that is standing or any part of a building that is standing, even if it shows evidence of cracking, bulging, sagging, bending, leaning, settling, shrinkage, or expansion.

Auto-Owners denied the claim and said even though the building was not safe, the building was still standing and the denied the claim.

In court filings, Community Garage argued that the roof did abruptly cave in and the building cannot be used for it intended purpose. Community Garage set forth policy construction and interpretation arguments that are often helpful to policyholders. The Michigan cases cited in support show that the policy should be given its plain and ordinary meaning and any ambiguity that is reasonably susceptible to more than one meaning will be resolved in favor of coverage for the insured.

Community Garage also pressed the court to require Auto-Owners prove this exclusion applied to this loss.

To assist in its argument, Community Garage had emails from defendant’s Executive General Adjuster and testimony of an expert who referred to the damage as “collapse” or “caving in.”

Both the trial court and the appellate court disagreed with Plaintiff and found that the property damage was not a covered loss and not considered a collapse. The court found no ambiguity and instead said that the policy included a provision that outlined what doesn’t qualify as collapse. The court explained that along with the explanation of collapse, the policyholder must also read Subsection D 1 and Subsection D (3)(a) that excludes coverage for any part of the building that is simply “in danger of falling down or caving in.”

The court addressed the emails by saying that collapse and caving was being used in the common usage and not specifically the way the policy details collapse and caving in—meaning the adjuster was using a general term. Further, the adjuster had recommended additional consideration of the policy form and called out Subsection D (3) for review.

Whether other courts will have different rulings depends on cases like this will depend on policy language and factual circumstances of the loss. Much of the analysis here seemed to center around whether the sagging roof was actually caving it. A drooping roof is what the court found was happening at Community Garage but the quick action of the owners to shore up the building may have been what stopped a traditional cave in and also protected the workers and occupants.

Interested in more posts about collapse coverage? Check out: