Another Federal Judge Dismisses Lawsuit For Crumbling Foundation, But Some Relief May Be Forthcoming

Jason Cleri | Property Insurance Coverage Law Blog | January 9, 2019

I’ve previously written about the issues insureds are facing in Connecticut regarding crumbling foundations.

In a blow to insureds in Connecticut affected by crumbling foundations due to the infusion of pyrrhotite, a mineral which gradually deteriorates concrete when exposed to water and oxygen, the Federal District Court for Connecticut ruled that the insureds, Richard and Denise Hyde, did not prove their case to sufficiently to overcome Allstate’s motion to dismiss.1 The Hydes, who had been living at their property in Tolland for 18 years, decided it was time to sell. When they had an engineer inspect their property in anticipation of the sale, the pyrrhotite defect was discovered. The Hydes sued Allstate after the denial, claiming the policy language was ambiguous as to coverage.

The trial court dismissed the action on two grounds:

  1. The court noted that it did not believe an ambiguity existed in the policy language regarding what was considered “sudden and accidental.”
  2. Allstate argued, and the court agreed, that the gradual concrete decay was not sudden and accidental, nor did it qualify for coverage as an entire collapse. In addition, there were other policy exclusions, such as an exclusion for cracking walls, rust, and defective construction materials that precluded coverage.

As a silver lining to insureds, Gov. Dannel Malloy and State Attorney General George Jepsenannounced in a joint release that state had entered into a memorandum of understanding with Travelers Companies to assist current and former Travelers policyholders seeking financial assistance to remediate crumbling foundations.

Under the agreement, Travelers will establish and administer the voluntary Travelers Benefit Program and commit $5 million to the program in conjunction with an assistance program launching through the Connecticut Foundations Solutions Indemnity Company.

I leave you with a quote from author and life coach, Craig D. Lounsbrough, “[t]he thing that I’m most likely to collapse under is not the weight of the stresses that stand around me, but the ego that sits within me.”
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1 Hyde v. Allstate Ins. Co., No. 3:18-cv-00031 (D.Conn. Dec. 4, 2018).

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.

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].

Connecticut Court Holds Unresolved Coverage Issues Makes Appraisal Premature

Michael S. Levine, Lorelie S. Masters & Geoffrey B. Fehling | Hunton Andrews Kurth | July 2, 2018

A Connecticut court recently denied a motion to compel appraisal of a claim for coverage of a commercial property damage claim, holding that, where the insurance policy at issue provides for appraisal of disputes related to the value or quantum or a loss suffered—not the rights and liabilities of the parties under the policy—appraisal is premature. The decision relied on law that equates insurance appraisal to arbitration and follows a number of decisions holding that parties cannot expand the scope of appraisal clauses to resolve questions of coverage or liability where, as in this case, those issues are not supported by the applicable policy language.

Background

Ice Cube Building (ICB) owned commercial property in Groton, Connecticut, that was covered by a property insurance policy issued by Scottsdale. Following a winter storm, the weight of the accumulated snow and ice caused the roof to leak and water to enter the building. ICB provided notice of the claim to Scottsdale, which acknowledged partial coverage for the loss. Scottsdale paid the undisputed amount of the claim, but ICB asserted that it had incurred additional, unreimbursed loss in excess of $1 million that was covered by the policy.

When Scottsdale refused to pay, ICB sued in state court for breach of contract and a declaratory judgment that the policy covered all of its unreimbursed losses. After Scottsdale removed the case to federal court and filed an answer and counterclaim, ICB moved to compel arbitration under the policy’s appraisal provision and to stay the litigation.

June 18 Decision

The parties did not dispute that the policy required appraisal of certain disputes, including appraisal as to the amount of loss, arising from the policy. They disagreed, however, on whether the policy’s appraisal clause requires arbitration of a dispute over coverage of ICB’s claim and not simply the amount of damage ICB asserts remains unpaid.

In its motion, ICB pointed to the disagreement on the “amount of loss it suffered” and its written demand for appraisal, arguing that Connecticut’s arbitration statute and the terms of the policy require the court to appoint an appraiser to assess its unreimbursed losses. Scottsdale countered by arguing that “an appraisal is premature because there are outstanding coverage issues that the Court must address as a condition predicate to the appraisal process.” The Court agreed with Scottsdale and denied the motion.

In reaching its decision, the Court noted that “the Policy unambiguously provides for arbitration of disagreements relating to the ‘value of the property’ or the ‘amount of loss’ suffered by the policyholder.” However, “[b]ecause the Policy expressly provides for the arbitration of disputes related to the value or quantum of a loss suffered—not the rights and liabilities of the parties under the Policy—and the Court may only compel the parties to arbitrate matters which they have agreed to arbitrate under the provisions of the insurance policy, the Court cannot compel the parties to arbitrate the question of coverage . . . .” The Court agreed with Scottsdale’s position that, where coverage is in dispute, those unresolved coverage issues posed antecedent questions for the court and are not appropriate for appraisal. As a result, the court denied ICB’s motion to compel appraisal as premature.

Takeaways

As this decision makes clear, appraisal should not be used to determine coverage issues impacting the scope of an insurer’s liability for the claim. The court in Ice Cube Building specifically relied on the language of the appraisal provision, pointing out that appraisal, as a type of arbitration, is a creature of contract and its scope cannot exceed what the parties agreed to. This distinction is often made clear in the policy’s appraisal provision, which commonly limit appraisal to the “amount of loss.”

As was the case in Ice Cube Building, courts have followed such unambiguous restrictions on the scope of issues addressed in appraisals and have refused to compel appraisal where disputed issues include questions of coverage and liability. In many cases, insurers attempt to invoke appraisal clauses prematurely, seeking to resolve issues of both the extent of damage and coverage. Interestingly in Ice Cube Building the policyholder attempted to force appraisal, and the insurer correctly noted that, under the terms of the policy, unresolved coverage and liability issues posed antecedent questions for the court to decide that were inappropriate for appraisal. Policyholders should carefully review the proper scope of appraisal provisions in first-party property policies to determine the most efficient and effective way to resolve disputed claims and to ensure that coverage issues are resolved in the appropriate forum or process. The case is Ice Cube Building, LLC v. Scottsdale Insurance Co., No. 3:17-CV-00973 (VAB), 2018 WL 3025037 (D. Conn. June 18, 2018).

Federal Court Certifies Question Regarding Collapse to Connecticut Supreme Court

Jason Cleri | Property Insurance Coverage Law Blog | June 6, 2018

Last year I wrote a blogpost about the large class action lawsuit in Connecticut centered on the crumbling foundations due to pyrrhotite in the concrete poured by the J.J. Mottes Company in approximately 20,000 buildings across Connecticut.

Recently, a federal judge has asked the Connecticut Supreme Court for a better definition of the word collapse,1 that was given in Beach v. Middlesex Mutual Assurance Co., 205 Conn. 246 (1987). In Beach, the Connecticut Supreme Court determined that collapse was not limited to a sudden and catastrophic nature, but, included substantial impairment of structural integrity of a building.

Many of the insureds’ lawsuits brought against insurance carriers due to the structural integrity of the concrete used the Beach definition of collapse in their defense. The trial court noted that although highly instructive, the Beach decision provides insufficient guidance and no appellate decision has squarely applied Beach and arrived at a definition of “substantial impairment of structural integrity.”

Three questions were presented for certification:

  1. Is “substantial impairment of structural integrity” the applicable standard for “collapse” under the provision at issue?
  2. If the answer to question one is yes, then what constitutes “substantial impairment of structural integrity” for purposes of applying the “collapse” provision of this homeowners’ insurance policy.
  3. Under Connecticut law, do the terms “foundation” and/or “retaining wall” in a homeowner insurance policy unambiguously include basement walls? If not, and if those terms are ambiguous, should extrinsic evidence as to the meaning of “foundation” and/or “retaining wall” be considered?

The Connecticut Supreme Court chose to certify only the second question, noting that if the term collapse is not defined, then Beach is the applicable standard. With respect to the third question, Connecticut courts have “consistently rejected” insurers’ arguments concerning the term foundation, having “determined that those policy terms were ambiguous,” and have “construed them against” the insurers.2

Stay tuned for updates.

I leave you with a relevant quote from former country music singer David Allan Coe:

“It is not the beauty of a building you should look at; it’s the construction of the foundation that will stand the test of time.”
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1 Karas v. Liberty Insurance Corp., No. 13-1836 (D. Conn. April 30, 2018).
2 Jang v. Liberty Mut. Fire Ins. Co., 2018 WL 1505574, at *3 (D. Conn. Mar. 27, 2018); see also, e.g.Gabriel v. Liberty Mut. Fire Ins. Co., 2017 WL 6731713, at *2 (D. Conn. Dec. 29, 2017) (noting prior determination “that the terms ‘foundation’ and ‘retaining wall,’ as used in the policy, were ambiguous.”); Belz v. Peerless Ins. Co., 46 F. Supp. 3d 157, 164 (D. Conn. 2014); Karas v. Liberty Ins. Corp., 33 F. Supp. 3d 110, 115 (D. Conn. 2014) (“Each party thus has a reasonable but different interpretation of the phrases [‘foundation’ and ‘retaining wall’] supported by dictionaries and case law, so the phrases are ambiguous, and the insurance policy should be construed against Liberty Mutual.”); Bacewicz v. NGM Ins. Co., 2010 WL 3023882, at *4 (D. Conn. Aug. 2, 2010) (“[A] reasonab[e] jury could find that the basement walls of the Bacewiczes’ house did not constitute the ‘foundation’ of the house.”)