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.”)

What is a Collapse? Crumbling Concrete Case is Catalyst for Coverage Query Certified to State Supreme Court

Verne Pedro | Property Insurance Coverage Law Blog | May 29, 2018

Recognizing the public policy implications of an unsettled, recurring coverage issue involving crumbling concrete foundations in thousands of Connecticut homes, U.S. District Court Judge Stefan Underhill recently certified the following insurance coverage question to the Supreme Court of Connecticut:

What constitutes a “substantial impairment of structural integrity” for purposes of applying the “collapse” provision of this homeowners’ insurance policy?1

The situation in Karas is one shared by approximately 34,000 homeowners whose foundations were built with concrete from the J.J. Mottes Concrete Co. (“Mottes”). Mottes concrete contains a mineral called pyrrhotite. Over time the iron sulfide in the pyrrhotite reacts with oxygen and water, causing the concrete to expand, crack and turn into rubble.

In October 2013, the Karases discovered their basement walls were deteriorating in the manner typical of Mottes concrete. On November 15, 2013, they reported a claim to their homeowners’ insurer. The insurer denied the claim the same day, asserting the loss described was “deterioration” and therefore not ocvered under the policy.

On December 11, 2013, the Karases sued the insurer, seeking coverage for their foundation as a covered “collapse” under Connecticut law. They alleged it was only a question of time until their basement walls fell in due to exterior pressure from the surrounding soil.

The Karases’ policy contains familiar language pertaining to collapse events:

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

* * * * *

b. Hidden decay;

c. Hidden insect or vermin damage;

d. Weight of contents, equipment, animals or people;

e. Weight of rain which collects on a roof; or

f. Use of defective material or methods in construction, remodeling or renovation.

* * * * *

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

The Karases relied on the material-impairment standard articulated in an earlier Connecticut Supreme Court case, which held that the term collapse in a homeowners’ policy was ambiguous if not defined, and any “substantial impairment of structural integrity” of a building was covered.2While the Beach decision rejected the argument that “collapse” requires a sudden and complete falling in of a structure,” it did not define the parameters of “substantial impairment of structural integrity.”3

Judge Underhill explained in the Karas Certification Order that he applied the Beach standard in other rulings on concrete-collapse cases. For instance, in Roberts v. Liberty Mutual Insurance Company, Underhill interpreted Beach to require that a ‘collapse’ (i.e., a substantial impairment of structural integrity) must be proved by evidence that a building “would have caved in had the plaintiffs not acted to repair the damage.”4

Judge Underhill also noted his belief that the standard enunciated in Beach is relatively clear. Nevertheless, on these facts, and because this “unsettled question of state law raises important issues of public policy,” and is “likely—indeed, almost certain—to recur,” Judge Underhill decided at this juncture to seek further guidance from the Connecticut Supreme Court.

The Judge further wrote:

Connecticut’s highest court should have the opportunity to decide whether my interpretation of Beach was correct …. Determining the extent to which the substantial loss should fall on homeowners or on their insurers entails value judgments and important public policy choices that the Connecticut Supreme Court is better situated to make.

There are currently a dozen or more federal lawsuits pending along with over forty crumbling concrete cases in state court. It will be interesting to see how the Connecticut Supreme Court resolves this unsettled issue of policy construction and insurance law.
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1 Karas v. Liberty Mutual Ins. Co., No. 3:13-cv-01836, 2018 WL 2002480 (D. Conn. April 30, 2018).
2 Beach v. Middlesex Mutual Assurance Co., 205 Conn. 246, 252 (1987).
3 Id.
4 Roberts v. Liberty Mutual Ins. Co., 264 F. Supp. 3d 394, 410 (D. Conn. 2017); see Sansone v. Nationwide Mut. Fire Ins. Co., 47 Conn. Supp. 35, 39 (Conn. Super. Ct. 1999)(observing that whether a plaintiff has proven a substantial impairment is a question of fact).

Terminating a Contract? Dot the i’s and Cross the t’s!

Stan Martin | Commonsense Construction Law LLC | October 24, 2017

From a Connecticut trial court comes a reminder to follow the contract process when terminating a contract. Failure to do so could constitute a breach by the one issuing the termination letter.

A sub and general contractor had many changes, claims and disputes on a complex hospital project. Semac, the sub, had overbilled for its work, and was facing the prospect of losing a lot of money to get to the finish line. When it couldn’t resolve multiple claims, Semac got so fed up that it started to pack up its tools and leave the site. Skanska, the GC, in the face of an unjustified abandonment by Semac, issued a termination letter effectively immediately. Except that the termination clause called for a 48-hour notice period and opportunity to cure.

Semac’s claim that the number and scope of changes amounted to a cardinal change in the contract was analyzed by the court, but turned down. The trial court concluded that Semac had been in financial distress, had front-loaded its billing, had disguised half a million dollars’ worth of payments to a company owner as payments for materials, and had failed to turn over a specific $250,000 payment that was supposed to go to a lower-tier sub.

Thus, Semac was in breach for abandoning the project. But Skanska then breached by failing to follow the subcontract provisions for terminating the contract for cause. Possibly because it wanted to seize Semac’s equipment, as it was entitled to under a default termination, Skanska did not allow Semac any opportunity to change its mind:

Under the contract, Skanska had the right to terminate Semac anytime it wanted with cause or without. But for Skanska to terminate Semac for cause as it said it was and grab Semac’s equipment, the contract provides that it had to give Semac 48 hours to cure its breach and get back on the job. The contract doesn’t name any exception or qualify this rule in any way. It doesn’t say that the provision doesn’t apply when the other party breaches first. It doesn’t say it doesn’t apply when the other party isn’t likely to make use of the 48-hour period to cure. Elsewhere in the contract it does say that Skanska may seek any other remedies available at law outside the contract, but it doesn’t say anything about rewriting explicit provisions already contained in the contract to make them easier on Skanska. So the 48-hour notice that was not given had to be given for Skanska to terminate Semac for cause.

The effect of this breach by both sides? Semac was not entitled to any further payment, and in fact had to reimburse Skanska for amounts overbilled. Skanska was not entitled to recover its considerable costs of completion of Semac’s work.

The lesson is this: if you are going to terminate a contract for cause, take steps to ensure that the contract terms for the termination are being followed. Even if you believe it would be futile or unnecessary to do so. The case is Semac Elec. Co. v. Skanska U.S. Bldg., Inc., 2017 Conn. Super. LEXIS 4320 (Aug. 23, 2017) (Lexis subscription required).