The Connecticut Supreme Court recently addressed whether an insurer has a duty to defend when faced with legal uncertainty as to whether coverage is owed: for example, when there is no Connecticut case law on point, and courts outside of the state have reached conflicting decisions.
The Court suggested that an insurer, in these circumstances, should defend the insured, and should seek a declaratory judgment from a court as to whether coverage is owed.
The issue in Nash St., LLC v. Main St. Am. Assurance Co., arose out of a home collapse in Milford, Connecticut. The owner of the home (Nash) hired a contractor (New Beginnings) to renovate the home. New Beginnings, in turn, retained a subcontractor to lift the house and to do concrete work on the foundation. While the subcontractor was lifting the house, the house shifted off the supporting cribbing and collapsed.
Nash sued New Beginnings, which tendered to its insurer (Main Street), which denied coverage. Main Street based its coverage denial on two exclusions in its policy. The first exclusion barred coverage for property damage to “[t]hat particular part of real property on which you or any contractor or subcontractor working directly or indirectly on your behalf is performing operations, if the ‘property damage’ arises out of those operations . . . .”. The second exclusion barred coverage for property damage to “[t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.”
Following Main Street’s refusal to defend, Nash obtained a default judgment against New Beginnings. When the judgment went unsatisfied, Nash brought a lawsuit against Main Street directly. The trial court – agreeing with Main Street’s position – found the exclusions barred any duty to defend. But, on appeal, the Connecticut Supreme Court reversed, and found a duty to defend had been owed.
In so ruling, the Court made clear that it was not opining on whether the exclusions actually precluded coverage. Indeed, the Court stated that it was not required “to determine conclusively what those exclusions mean.” Instead, the Court noted that New Beginnings’ tender gave rise to uncertainty as to coverage under Connecticut law; and it said this legal uncertainty was sufficient to trigger Main Street’s duty to defend.
Discussing the issue further, the Court noted that uncertainties as to coverage can be either factual or legal. A factual uncertainty exists when it is unclear from the face of a complaint whether the allegations fall within coverage. A legal uncertainty commonly occurs when policy language is ambiguous in application to the specific factual scenario at issue. But, extending this principle, the Court found legal uncertainty also exists in a second scenario: when there is a split of authority in other jurisdictions as to the meaning of a particular policy provision, and there is no relevant appellate authority within Connecticut.
This case presented a legal uncertainty of this type:
In some states, such as Massachusetts, courts broadly construe the phrase “that particular part,” finding – in the case of a general contractor – that it refers to an entire structure the insured is working on, and bars coverage for damage to any part of that structure.
In other states, courts construe the exclusion more narrowly. In these states, a court might find, for example, that the phrase “that particular part” only referred only to the foundation the subcontractor was hired to repair, and did not refer to (or bar coverage for damage to) the other parts of the home that was being lifted.
Faced with this split of authority – and absent any Connecticut appellate authority on point – the court found a legal uncertainty as to the applicability of these exclusions, and concluded that Main Street was required to defend New Beginnings.
In the future, the Court suggested, insurers faced with a legal uncertainty of this type should consider offering defense under reservation of rights, and pursuing a declaratory judgment action to try to resolve the proper construction of the disputed policy language.
Nationwide, homeowners’ insurers routinely face foundation wall collapse claims. But in Connecticut, where at least 30,000 homes are believed to have been constructed in the 1980s and 1990s with defective concrete, the scope of homeowners insurance for collapse claims has been a closely watched issue. In Jemiola v. Hartford Casualty Insurance Co., 2019 WL 5955904 (Conn. Nov. 12, 2019), the Supreme Court of Connecticut held that a collapse coverage grant requiring “an abrupt falling down or caving in of a building… with the result that the building… cannot be occupied for its intended purpose” is unambiguous and enforceable.
In Jemiola, the insured homeowner purchased her home in 1986 and insured it continuously with the same insurer. In 2006, the homeowner noticed cracking in a basement wall, and was informed that the cracking likely resulted from defective concrete used in the construction of the home. The homeowner made a claim under her policy’s collapse coverage, which the insurer denied because the cracking did not compromise the structural integrity of the foundation walls. In the resulting lawsuit, the insured’s expert opined that the defective concrete substantially impaired the foundation walls’ structural integrity, but that this impairment did not commence until 2006 when the homeowner first noticed the cracking. Accordingly, the court analyzed coverage under the collapse coverage grant in effect in 2006, which defined collapse to mean “an abrupt falling down or caving in of a building… with the result that the building… cannot be occupied for its intended purpose.”
In interpreting the scope of the collapse coverage, the Court surveyed case law throughout the country and noted that “every single court that interpreted the policy language at issue in the present case… has concluded that a building that is still standing, even if it is in danger of falling down, has not suffered a collapse within the meaning of the policy.” The Court further rejected the insured’s argument that the collapse provision was ambiguous because its plain and ordinary meaning simply did not encompass a home “that is still standing and capable of being safely lived in for many years – if not decades – to come.”
In Connecticut, policyholders and their representatives have now attempted to secure coverage for foundation claims through all three branches of government. In Jemiola, the Supreme Court of Connecticut upheld the policy language requiring an abrupt falling down or caving in that results in the home being uninhabitable. Given the potential economic impact of the Court’s ruling on homeowners, this issue will require continued monitoring.
Connecticut courts have been inundated with collapse cases the past couple of years due to insureds’ living in homes that were constructed with defective concrete manufactured by J.J. Mottes Concrete Company. In a duo of cases, the Connecticut Supreme Court responded to a certified question from the U.S. District Court, holding that collapse required that the building be in imminent danger of falling down. Vera v. Liberty Mut. Fire Ins. Co., 2019 Conn. LEXIS 339 (Conn. Nov. 12, 2019).
Plaintiffs had resided in their home since 2009. The home was built in 1993. In August 2015, after learning about the problem of crumbling basement walls affecting homes in their community due to cement manufactured by Mottes, they retained a structural engineer to evaluate their basement walls. The engineer found spider web cracking approximately 1/16 of an inch wide in the basement walls and three small vertical cracks. There were no visible signs of bowing. The engineer did not find that the walls were in imminent danger of falling down, but recommended that the basement walls be replaced.
Plaintiffs submitted a claim under their homeowners policy to Liberty Mutual. The claim was denied. The policy did not define collapse, but stated that collapse did not include “settling, cracking, shrinking, bulging or expansion.”
Plaintiffs sued in state court and Liberty Mutual removed to the federal district court. Liberty Mutual moved for summary judgment, arguing that plaintiffs could not establish a substantial impairment of the structural integrity of the basement walls without proof that the walls were in imminent danger of falling down or caving in. The federal district court certified a question to the Connecticut Supreme Court, asking the Supreme Court to clarify the meaning of the term “collapse” when the term was not defined in a homeowner’s policy.
The seminal case in Connecticut was Beach v. Middlesex Mut. Assurance Co., 532 A. 2d 1297 (1987), where the court held that “collapse,” when not defined in the policy, was sufficiently ambiguous to include coverage for any substantial impairment of the structural integrity of the insured’s home. Now the court considered whether “collapse” also required that the building be in imminent danger of falling down or caving in.
The court held that to meet the substantial impairment standard, an insured whose home had not actually collapsed had to present evidence demonstrating that the home nevertheless was in imminent danger of such a collapse. In other words, the insured had to show that the building was in imminent danger of falling down or caving in.
On October 4, 2019 (almost two years after granting certification), the Connecticut Supreme Court affirmed the Appellate Court’s rulings on four key coverage issues in R.T. Vanderbilt Company v. Hartford Accident & Indemnity Company, et al. The coverage dispute in Vanderbilt concerns underlying actions alleging that talc and silica mined and sold by the insured contained asbestos and/or caused asbestos-related disease. The case has been proceeding in phases, two of which have been tried to date, resulting in the matter on appeal.
(1) “Continuous Trigger” Theory of Coverage Applies: The Court affirmed and adopted the Appellate Court’s opinion applying a “continuous trigger” for the underlying claims at issue, and agreed that the trial court properly excluded testimony from medical experts the insurers had proffered to prove that the asbestos disease process did not support a continuous trigger.
(2) The “Unavailability of Insurance” Exception to Time-on-Risk Pro Rata Allocation Applies: The Court affirmed and adopted the Appellate Court’s ruling that (a) damages and defense costs should not be allocated to any period in which insurance was “unavailable” in the market, (b) the insurers bear the burden of proving that coverage for asbestos liabilities was available to the policyholder after the date asbestos exclusions were added to the policies and (c) the insured bears the burden of proving that it was unable to obtain asbestos coverage prior to 1986 (when such insurance was generally available). The Appellate Court recognized that, in certain circumstances, there could be an “equitable exception” to the unavailability rule if the insured continued to manufacture products containing asbestos after 1986 with the knowledge that such products were hazardous and uninsurable (circumstances which the court found were not present in this case).
(3) The “Sudden and Accidental” and “Absolute” Pollution Exclusions Are Only Applicable to Claims Arising From “Traditional” Environmental Pollution and Not Occupational Disease Caused by Exposure to Asbestos: The Court affirmed and adopted the Appellate Court’s conclusion that the pollution exclusions were intended to apply only to “traditional environmental pollution” and not to disease caused by exposure to asbestos.
(4) Occupational Disease Exclusions Precludes Coverage for Claims of Occupational Disease, Regardless of Whether the Claimant Was Employed by the Policyholder or a Third Party: Noting that this is an issue of first impression nationally, the Court affirmed the Appellate Court’s ruling that the occupational disease exclusions contained in certain excess policies applied to the underlying asbestos-related claims, which the parties stipulated were brought by non-employees. The Court agreed with the insurers’ argument that “occupational disease” has a plain meaning that is broader than the workers’ compensation context.
This is the first occasion in which the Connecticut Supreme Court has ruled definitively on the application of a “continuous trigger,” the “unavailability” rule and the application of pollution exclusions in the context of asbestos-related claims. As noted above, the occupational disease exclusion issue was one which the Court noted is of first impression nationally.
A year ago, we wrote about a rapidly emerging area of insurance litigation in Connecticut: crumbling foundations. As a quick recap, tens of thousands of homes in northeastern Connecticut built over a span of more than 30 years may have been constructed with defective concrete that causes basement walls to prematurely deteriorate and eventually become structurally unsound.
The Crumbling Foundation Crisis
The problem, known as alkali-silica reaction (ASR), is the result of a chemical reaction caused by pyrrhotite, a natural occurring mineral used in the production of concrete from a manufacturer in northeast Connecticut. Last year, we noted that a federal judge had dismissed one ASR claim against Allstate Insurance Co. and that local federal courts had certified questions from crumbling foundation cases to the Connecticut Supreme Court.
The Connecticut Supreme Court recently answered those certified questions and provided significant guidance regarding crumbling foundation litigation in three decisions.
The facts of all three cases are typical of the many lawsuits regarding crumbling foundations that homeowners have brought against insurers in the past few years. Homeowners noticed cracking and/or crumbling in their basement walls. They submitted claims under their homeowners insurance policies, often after a structural engineer determined that the cracking was the result of ASR, a nonreversible condition. The insurers denied the homeowners’ claims, generally relying on language excluding coverage for settling and/or faulty materials. The homeowners then filed lawsuits for breach of contract and violations of the Connecticut Unfair Insurance and Unfair Trade Practices Acts.
The plaintiffs argued that the deterioration of the concrete in their basement walls substantially impaired the structural integrity of their homes such that the homes were in a state of collapse and were therefore covered because the policies at issue covered collapse.
To support their argument, the plaintiffs relied on the Connecticut Supreme Court’s decision in Beach v. Middlesex Mutual Assurance Co., 205 Conn. 246, 532 A.2d 1297 (1987). In that case, the court concluded that the term “collapse” “is sufficiently ambiguous to include coverage for any substantial impairment of the structural integrity” of an insured’s home at least when, as was the case in the policy at issue in Beach, “collapse” was undefined.
Three cases eventually found their way to the Connecticut Supreme Court through certified questions from local federal courts or decisions rendered by Connecticut trial courts.
Karas v. Liberty Insurance Corp.: What Is “Substantial Impairment”?
In its primary decision, Karas v. Liberty Insurance Corp., the Connecticut Supreme Court concluded that the Beach standard applied to the Liberty policy at issue because that policy did not clearly define “collapse,” although the policy did provide that “[c]ollapse does not include settling, cracking, shrinking, bulging or expansion.” When not clearly defined, as it was in this case, the court noted that the term “collapse” can mean “not including mere settling or cracking, but including settling or cracking that results in substantial impairment of a home’s structural integrity.” The court explained, however, that the insurer could have easily limited its collapse coverage by using language that “unmistakably connote[s] an actual collapse.”
The court then expounded on the “substantial impairment” standard established in Beach, explaining “that, to meet the substantial impairment standard, an insured whose home has not actually collapsed must present evidence demonstrating that the home nevertheless is in imminent danger of such a collapse.” The court further explained: “[W]hether [the] evidence satisfies th[at] standard in any particular case necessarily will depend on the specific facts of the case and the strength and credibility of the expert testimony adduced by the insured and the insurer.”
In light of the fact that Karas involved questions certified from the district court, the Connecticut Supreme Court did not render a decision as to whether the “substantial impairment” standard was satisfied in this case and left that decision up to the federal court. The district court’s decision will be one to watch out for: The crumbling foundation in Karas was particularly severe, and the homeowners had already reinforced their basement walls with wood shoring based on the recommendation of an engineer. Karas therefore presents at least an arguable case for satisfying the “substantial impairment” standard, but the plaintiffs’ expert was undoubtedly asked whether he believed that the home was in “imminent danger of … collapse,” and the Connecticut Supreme Court’s decision does not reflect how the plaintiffs’ expert answered that question.
The Supreme Court also concluded that the term “foundation” in the policy at issue unambiguously includes basement walls and that the collapse provision of the policy therefore applied to any foundation. The court noted, among other things, that people generally understand that the concrete basement walls in their home are part of its foundation.
The Connecticut Supreme Court also decided two companion cases.
Jemiola v. Hartford Casualty Insurance Co.: Which Policy Applies?
In the first, Jemiola v. Hartford Casualty Insurance Co., the court considered a common issue in crumbling foundation cases: Which homeowners insurance policy applies. Like many insurers, Harford Casualty’s homeowners policy did not clearly define the term “collapse” for many years. Beginning in 2005, however, Hartford Casualty added language to its policy narrowly defining “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.” The policy went on to note that a building that was in danger of falling down was not in a state of collapse, a building that was standing was not collapsed, and a building is not in a state of collapse even when it shows evidence of cracking, bulging, settling, etc.
The plaintiff in Jemiola asserted that she noted cracking in her master bedroom in the late 1990s, nails popping out of her kitchen walls in between 2005 and 2006, and more nails displaced from windows around her house in 2009 and 2010. She claimed she first noticed cracks in her basement in 2006, but a contractor told her they were normal. In 2014, she noticed more cracking in her basement and learned that her house likely was constructed with defective concrete.
A structural engineer hired by the plaintiff opined that her home did not become structurally impaired until there was some outward manifestation of cracking and fracturing in her basement walls. Based on the plaintiff’s observations, that occurred by 2006.
The court noted that in order for the pre-2005 policies to apply, there must have been a substantial impairment of structural integrity prior to 2006. The combined testimony of the plaintiff and her expert established only that such an impairment existed by 2006, not that it existed before then. The plaintiff’s expert did not testify that the plaintiff’s earlier observations regarding cracks in her bedroom and nails in her kitchen wall were connected to the cracks in the basement.
As a result, the court applied the post-2005 policy language and concluded that the plaintiff’s home, which was still standing, had not “collapsed” under the policy. The court noted that the language in the policies required a temporal abruptness requirement and concluded that “a building that is still standing, even if it is in danger of falling down, has not suffered a collapse within the meaning of the policy.” The court noted, however, that the “issue of how extensive an actual collapse must be before coverage is triggered is not before” it and therefore declined to determine “whether the policy’s partial collapse provision is internally consistent with” other provisions.
The court therefore affirmed the superior court’s decision granting summary judgment to the defendant insurer in a significant win for Hartford Casualty Insurance Co.
In closing, the court noted that even if it agreed with the plaintiff’s claim regarding what policy applied, it would apply the standard articulated in Beach and conclude that summary judgment was proper because the plaintiff’s home was not in imminent danger of falling down.
Vera v. Liberty Mutual Fire Insurance Co.: What About a Mildly Affected Home?
In the final case, Vera v. Liberty Mutual Fire Insurance Co., the court extended its holding in Karas to a home that was only mildly affected by ASR. According to the plaintiffs’ expert, the home was one of the least affected homes he had inspected. There were narrow spider cracks in the basement but no visible signs of bowing. The home was afflicted with ASR and the walls would eventually begin to bulge, but the expert could not testify with a reasonable degree of engineering probability that the walls would begin to bulge within the next hundred years, although he did say that it was probable that the walls would need to be replaced in that time frame.
Because Vera also involved a certified question, the Connecticut Supreme Court stopped short of applying its decision to the fact before it. The court’s recitation of the facts of that case, however, leaves little doubt that the plaintiffs will have an exceptionally hard time prevailing. According to the plaintiffs’ own expert, the plaintiffs’ home was not “in imminent danger of … collapse.”
A Win for Insurers
The Connecticut Supreme Court’s decisions are a win for insurers. First, the court reaffirmed insurers’ rights to define “collapse” narrowly to avoid coverage in situations in which a home’s foundation is crumbling but has not yet fallen down. Second, the court’s explanation of the Beach standard that applies to policies that do not sufficiently define “collapse” as requiring an “imminent danger of … collapse” effectively eliminates many claims against insurers. The policy in Vera is one such example. While some houses may be in imminent danger of collapse, many of them likely are not and will not be for many years. Nevertheless, crumbling foundations will likely remain an area of considerable claims activity and potential litigation for the foreseeable future, if for no other reason than the high stakes for individual homeowners.