Collapse Coverage: Second Circuit Holds That Cracking Walls Do Not Constitute “Collapse”

Dina R. Richman | Property Insurance Law Observer | May 6, 2019

Most homeowners’ policies – and property insurance policies in general – contain a limited coverage extension for “collapse.”  The interpretation of that collapse coverage has been litigated around the country for decades, with different jurisdictions reaching considerably different results.  The latest of these decisions, Valls v. Allstate Insurance Company, No. 17-3495-cv (2d Cir. 2019), comes out of the Second Circuit, deciding the case under Connecticut law.  The case presented a single substantive question: does the “collapse” provision afford coverage for basement walls which had significant cracking but remain standing?  Both the district court (D. Conn.) and the Second Circuit Court of Appeal concluded that it does not.

In Valls, the plaintiffs owned a home in Connecticut which was insured by Allstate.  The Allstate policy excluded “collapse,” but then contained a collapse coverage extension, which provided:

We will cover:

a) the entire collapse of a covered building structure;

b) the entire collapse of part of a covered building structure; and

c) direct physical loss to covered property caused by (a) or (b) above.

For coverage to apply, the collapse of a building structure specified in (a) or (b) above must be a sudden and accidental direct physical loss caused by one or more of the following: . . .

b) hidden decay of the building structure; . . .

f) defective methods or materials used in construction, repair, remodeling or renovation.

Collapse does not include settling, cracking, shrinking, bulging or expansion

The Valls noticed several horizontal and vertical cracks in their basement walls, but the walls remained standing.  The Valls made a claim to Allstate, arguing that the damage should be covered under the collapse provision.  Allstate denied coverage, and the Valls filed suit.  The district court granted Allstate’s motion to dismiss, concluding that the collapse coverage did not apply.  The Valls appealed, and the Second Circuit Court of Appeal affirmed the district court’s decision, finding that mere cracking did not constitute “collapse.”

In reaching this conclusion, the Second Circuit looked at the policy’s requirements that the collapse be “sudden and accidental” and that it be an “entire collapse.”  First, the Court noted that the erosion and cracking of the basement walls had occurred gradually, and therefore was not “sudden and accidental.”  Second, the Court found that even if the cracking had been sudden, it would still not be covered because the damage could not be deemed an “entire collapse.”  Although the Policy did not define “entire collapse,” it expressly excluded “settling, cracking, shrinking, bulging or expansion.”  Accordingly, there was no coverage for the loss.

By determining that cracking is not an “entire collapse,” the Second Circuit joins several other states who have reached similar conclusions.  For instance, in Higgins v. Connecticut Fire Ins.Co., 163 Colo. 292 (1967), the Supreme Court of Colorado held that the cracking and upheaval in a floor could not be considered a “collapse.”  Similarly, in Doheny W. Homeowners Ass’n v. Am. Guar. & Liab. Ins. Co., 60 Cal.App.4th 400 (Cal.Ct.App. 1997), the California Court of Appeal held that although “imminent” collapse may be covered, it does not include mere cracking or settlement.

Other states have reached the opposite conclusion.  In Jenkins v. United States Fire Ins. Co., 185 Kan. 665 (1959), the Kansas Supreme Court held that the “collapse” provision included the “settling, falling, cracking, bulging or breaking of the insured building…in such manner as to materially impair the basis structure or substantial integrity of the building[.]”

In response to cases such as Jenkins insurers began including the limitations in the collapse provision – such as requiring complete collapse and excluding cracking and settling.  Many courts which have addressed the limitations in the collapse provision end up concluding that the provision does not provide coverage for settling and cracking.  See, e.g. Krug v. Milles’ Mut. Ins. Ass’n of Ill., 209 Kan. 111 (1972) (distinguishing Jenkins due to different policy language).  And yet other courts continue to apply a very broad application of “collapse” even with the added limitations.  For instance, in American Concept Ins. Co. v. Jones, 935 F.Supp. 1220 (D. Utah 1996), a district court in Utah held that the term “collapse” was ambiguous, and that settling and cracking could still be “collapse” despite the fact that the policy stated that collapse did not include settling or cracking.

The Second Circuit’s Valls opinion is now part of a sizeable body of case law from around the country interpreting the “collapse” coverage in property insurance policies.  Without a doubt, as the policy language evolves, litigation over the breadth and meaning of “collapse” coverage will also continue.

Collapse Loss Ambiguity Determined With Dictionary Help

Jason Cleri | Property Insurance Coverage Law Blog | May 5, 2019

Feenix Parkside LLC owed a commercial building that incurred a partial collapse to their ceiling. When Feenix sought coverage for the collapse, the insurer—Berkley North Pacific—denied coverage for the loss. When Feenix reported the loss, they stated the collapse was due to decay, which was a gradual decline in strength and soundness.

Berkley declined coverage due, in part, to the opinion generated by their engineer who concluded the roof collapsed because 1) the configuration of the truss plate connection adjacent to the rear exterior bearing wall had inadequate strength to resist the applied loads; 2) higher than normal temperatures reduced the strength of the wood trusses by up to 30 percent. Berkley denied the claim because the loss was caused by “defective methods in construction and excessive temperatures in the attic” which are not covered causes of loss under the policy’s collapse coverage.

Feenix hired their own engineer who determined the collapse was due to the combined effects of both an elevated temperature in the attic space as well as a moisture content exceeding 19% for an extended period of time.

After the trial court granted Berkley’s Motion for Summary Judgment, Feenix appealed1 stating that the term “decay” was ambiguous and that the trial court erred in finding the term umambiguous.

The appellate court noted that Webster’s dictionary defines “decay” as “the condition of a person or thing that has undergone a decline in strength, soundness, or prosperity or has been diminished in degree of excellence or perfection.” Feenix cited to a case which I blogged about earlier this year, Easthampton Congregational Church v. Church Mutual Insurance Co., 322 F.Supp3d 230 (D. Mass. 2018).

Using the same reasoning that was in Easthampton, and overturning the trial court decision, the court opined that if Berkley wanted to limit coverage for collapse to collapse caused or contributed to by “rot,” as opposed to “decay,” it could have done so. The court ultimately concluded that the trial court erred by stating the “only reasonable interpretation” of “decay” is one that indicates some kind of decomposition of the material and rejecting Feenix’s definition.

This is a good trend for insureds in that the courts are now holding insurance companies accountable for the complicated language and methods they use to find exclusions in the policy to decline coverage rather than finding exceptions or endorsements in the policy to apply coverage. Since insurance companies are the ones who write out these contracts of adhesion, they should be made to define every term in the policy clearly and how they would like it to be applied. It should not be incumbent on the insureds to have to file suit to get a judge to interpret policy language when the insurance company could have easily added language to explain. I hope more judges and jurisdictions adopt the reasoning in Easthampton and now in Feenix.

I leave you with a quote from the late American-German painter, Hans Hofmann:

The ability to simplify means to eliminate the unnecessary so that the necessary may speak.
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1 Feenix Parkside LLC v. Berkley North Pacific and Continental Western Ins. Co., Docket No. 77303-8-I (Wash. April 8, 2019).

Church vs. Church – Court Uses Dictionary to Define “Decay”

Jason Cleri | Property Insurance Coverage Law Blog | March 8, 2019

Easthampton Congregational Church submitted an insurance claim to Church Mutual Insurance Company when their roof suddenly collapsed. Church Mutual denied coverage for faulty construction after they sent their engineer, Joseph Malo, out to inspect the property. Mr. Malo noted, and the insured agreed, there was “progressive failure of the fasteners used to attach the layers of the ceiling to the ceiling joists due to the weight of the ceiling” which eventually caused the collapse.

Easthampton asked Church Mutual to reconsider their position stating that the roof was entirely effective in that it had lasted for approximately sixty years and that the loss was covered under the collapse provision which stated:

2. We will pay for direct physical loss or damage to Covered Property, caused by collapse of a [covered property]…if the collapse is caused by one or more of the following:

b. Decay that is hidden from view, unless the presence of such decay is known to an insured prior to collapse;

f. Use of defective material or methods in construction, remodeling, or renovation if the collapse occurs during the course of the construction, remodeling, or renovation. However, if the collapse occurs after construction, remodeling, or renovation is complete and is caused in part by a cause of loss listed [in the previous sections]; we will pay for the loss or damage even if use of defective material or methods, in construction, remodeling, or renovation, contributes to the collapse.

The insurer, in its denial also rejected the insured’s allegation that hidden decay contributed to the collapse.

The trial court held that “the most reasonable reading of the word ‘decay’ as it is used in the Policy is that it refers to the broader concept of the word.” That is, a “gradual decline in strength” or “progressive decline” as opposed to a narrower definition that entails organic rotting.

The appellate court, while not necessarily agreeing with the trial court’s reasoning, affirmed their decision to grant summary judgment in favor of the insured because it was clear that an ambiguity existed as to the definition of the word decay.1

Notably, the First Circuit was not too fond of the insurer’s argument that the chosen definition of decay would encompass all collapses, because “it is difficult to imagine any collapse, of any structure, being cause by something other than ‘decay.’” The court noted:

But, even if the insurance company did not intend to provide coverage for collapses like the one in question, that is a self-inflicted problem. The insurance company, which wrote the policy, could simply have defined “decay” narrowly or limited the coverage period.

I leave you with a quote from English philosopher, Thomas Hobbes:

“[i]magination, therefore, is nothing but decaying sense. . . .”
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1 Easthampton Congregational Church v. Church Mutual Ins. Co., No. 18-1881, 2019 WL 851191 (1st Cir. Feb. 22, 2019).

Deterioration Known To Insured Forecloses Collapse Coverage

Tred R. Eyerly | Insurance Law Hawaii | December 26, 2018

   The insurer properly denied coverage for collapse of a building when the insured knew from an expert’s examination that the walls of his house were deteriorating. Jaimes v. Liberty Ins. Corp., 2018 U. S. Dust. LEXIS 198224 (D. Colo. Nov. 21, 2018). 

   The insured discovered a crack in the wall of his home. He hired Anchor Engineering to inspect. Anchor found a large bulge in the south wall. Several problems with deterioration were noted in the basement. The structure of the house was unstable and dangerous.

   The insured filed a claim with his homeowners insurer, Liberty. The claim was  denied because damage to the wall was the result of deterioration. 

   The south wall of the house later collapsed. The insured submitted a second claim. Liberty again denied the claim because the collapse was the result of deterioration of the wall. The insured sued.

   The policy covered collapse of any part of a building caused by hidden decay. Liberty argued there was no coverage for the first claim because no wall had collapsed. The insured argued the cracking wall was subsumed into his second claim and should be covered as hidden decay. For purposes of this decision, the court agreed the first claim was subsumed into the second claim. 

   Nevertheless, there was no coverage. There were several statements in the Anchor letter that would put a reasonable person on notice that there was decay in the house. For example, the letter stated that in the basement, a number of floor joist ends had deteriorated. Further, mortar deterioration was severe. 

   The parties agreed that the terms deterioration and decay were interchangeable. Accordingly, there was no genuine dispute about the fact that Anchor communicated with the insured that there was decay around the wood bearing plate in the foundation wall and in floor joists. The insured should have understood the decay that Anchor observed was related to his explanation of the south wall – the wall that eventually collapsed. Therefore, the insured reasonably should have known of the decay before the collapse occurred. 

   Therefore, the collapse was not caused by hidden decay and there was no coverage under the policy. 

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.