Property Insurance Coverage Law Blog : Florida Insurance Lawyer & Attorney : Merlin Law Group Law Firm : Tampa, Houston, Coral Gables, Gulfport

The amount of litigation over the stages of collapse induced some insurers define the term “collapse.”

Some policies explicitly state that settling, shrinking and expansion is not collapse; however, in the absence of this limitation, some courts have held that when the settling, shrinking or expansion has caused the property to be effectively unusable, there is constructive collapse.

11 Couch on Ins. § 153:69.

Not surprisingly, public adjusters, policyholders and their lawyers have often read these definitions and wondered “is coverage triggered when a building becomes distressed, vacated due to imminent collapse, or only when flattened and destroyed? At what stage in the process is collapse coverage triggered?”

This month, the Eighth Circuit issued its latest opinion on the issue in KAAPA Ethanol, LLC v. Affiliated FM Ins. Co., No. 10-1929, 2011 WL 5217207 (8th Cir. Nov. 3, 2011), and provided some guidance on what constitutes collapse and whether collapse must be imminent in order to trigger coverage. In KAAPA Ethanol, LLC v. Affiliated FM Ins. Co, KAAPA managed a facility that distilled corn into ethanol. The facility structure was insured against property damage by an “all-risk” insurance policy issued by Affiliated FM Insurance Company. KAAPA’s storage tanks “began to lean, their foundations began showing visible signs of distress, and their supporting concrete walls sunk into the ground.” When the insurer denied KAAPA's claim, it filed suit against the insurer to recover the cost of extensive repairs and business interruption losses.

The policy at issue did not define collapse. The policy covered “all risks of direct physical loss or damage to the insured property except as excluded under this policy.” The following exclusions were at issue:

GROUP II. This policy does not insure against loss or damage caused by the following perils; however, if loss or damage not excluded results, then that resulting loss or damage is covered.
* * * * *
2. Defects in materials, faulty workmanship, faulty construction or faulty design.
* * * * *
7. Settling, cracking, shrinkage, bulging, or expansion of [foundations, walls, floors, roofs, or ceilings]. This exclusion will not apply to loss or damage resulting from collapse of: a building or structure; or material part of a building or structure.

The jury heard extensive testimony from structural experts and, after a lengthy trial, found that some losses were caused by “collapse” of the tanks and awarded KAAPA damages of nearly $4 million.

Among several arguments it raised on appeal, the insurer argued that the district court erred in instructing the jury when a “collapse” has occurred under Nebraska law. Specifically, the Eighth Circuit analyzed whether the Nebraska Supreme Court would require imminent danger of collapse before coverage was triggered. The Court noted,

Ever since first-party insurance policies began including “collapse” coverages and exclusions over fifty years ago, courts have disagreed whether the collapse of a structure requires proof of a “falling in ... loss of shape, [or] reduction to flattened form or rubble” (the “rubble-on-the-ground” standard), or only proof of damage that materially impaired the structure's “substantial integrity” (the “material-impairment” standard). Compare Cent. Mut. Ins. Co. v. Royal, 269 Ala. 372, 113 So.2d 680, 683 (Ala.1959), with Jenkins v. U.S. Fire Ins. Co., 185 Kan. 665, 347 P.2d 417, 422–23 (Kan.1959). It is undisputed that the Supreme Court of Nebraska adopted the material-impairment standard in Morton v. Travelers Indem. Co., 171 Neb. 433, 106 N.W.2d 710, 720-21 (Neb.1960), and that standard has since become the majority view. But some courts applying the standard in later cases have ruled that a structure must be in “imminent danger” of falling to the ground, or must be abandoned or taken out of service, before a material impairment will constitute a collapse.

The Eighth Circuit examined law from other jurisdictions which used a material-impairment standard and noted that the majority view requires a showing that actual collapse “be imminent before coverage exists.” See Zoo Props., LLP v. Midwest Family Mut. Ins. Co., 797 N.W.2d 779, 781–82 (S.D. 2011).

In this context, “ ‘[i]mminent’ means collapse is ‘likely to happen without delay; impending or threatening;’ and requires a showing of more than substantial impairment.” Ocean Winds Council of Co–Owners, Inc. v. Auto–Owner Ins. Co., 350 S.C. 268, 565 S.E.2d 306, 308 (S.C. 2002) . . . numerous courts have required proof of a serious impairment “that connotes imminent collapse threatening the preservation of the building.” Fantis Foods, Inc. v. N. River Ins. Co., 753 A.2d 176, 183, 185 (N.J. Super. Ct.App. Div. 2000); accord Assur. Co. of Am. v. Wall & Assocs. LLC of Olympia, 379 F.3d 557, 563 (9th Cir. 2004); Buczek v. Cont'l Cas. Ins. Co., 378 F.3d 284, 290–91 (3d Cir. 2004); Weiner v. Selective Way Ins. Co., 793 A.2d 434, 443 (Del. Super.Ct. 2002). Other cases, while not addressing the issue, have noted that actual collapse was imminent in extending coverage to material impairments of structural integrity.

The court then noted that a structure does not need to be abandoned or taken out of service before a material impairment can be considered a “collapse.” Although evidence as to whether a structure “remained usable and continued to be occupied” may be relevant to whether a “collapse” occurred, it is not necessary or essential that a structure be taken out of service or rendered uninhabitable. See John Akridge Co. v. Travelers Companies, 876 F.Supp. 1, 2 (D.D.C. 1995); Beach v. Middlesex Mut. Assurance Co., 205 Conn. 246, 532 A.2d 1297, 1301 (Conn. 1987); N–Ren Corp. v. American Home Assurance Co., 619 F.2d 784, 788 (8th Cir. 1980).

Although this opinion is based on Nebraska law and is the circuit court’s best guess at how the Nebraska Supreme Court would rule, the opinion is helpful to policyholders and others attempting to decipher their particular insurance policy’s collapse coverage—especially those policies lacking any definition of collapse.

This was the scenario in Driscoll v. Providence Mut. Fire Ins. Co., 69 Mass. App. Ct. 341 (Mass. App. Ct. 2007), where the judge found that "both faulty design and the weight of snow and ice caused the damage." The insurance company denied the loss, citing, in part, the following standard exclusion:

Negligent Work: Faulty, inadequate or defective:

(1) Planning, zoning, development, surveying, siting;

(2) Design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction;

(3) Materials used in repair, construction, renovation or modeling; or

(4) Maintenance;
of part or all of any property on or off the described premises.

The important point for coverage counsel and policyholders to remember is that this is a B.3 and not a B.1 exclusion. The saving language for policyholders is similar to the "Lazaraus Clauses" I wrote about in Water Loss Denied? Ensuing Loss Provisions May Provide Coverage. The important language is the following:

We will not pay for loss or damage caused by or resulting from any of the following. But if loss or damage by a Covered Cause of Loss results, we will pay for that resulting loss or damage.

The Driscoll Court got it right when it noted:

Here, the physical damage caused by the weight of snow and ice is nowhere excluded...

Furthermore, no other exclusions apply. This includes the exclusion for settling, cracking, shrinking, or expansion under paragraph B.2.k.(4)...which the judge specifically and correctly found did not occur, and the exclusion for faulty workmanship or construction under paragraph B.3.c... The latter exclusion does not apply because it is preceded by the following language: "We will not pay for loss or damage caused by or resulting from any of the following. But if loss or damage by a Covered Cause of Loss results, we will pay for that resulting loss or damage." Covered causes are, according to paragraph A.3. discussed above, all causes except those excluded in section B (or limited by paragraph A.4.). The judge found that both faulty design and the weight of snow and ice caused the damage. The latter is a covered cause of loss which is not excluded, and therefore the faulty design exclusion does not bar coverage.

So, let it snow, let it snow, let it snow. And, don't let the insurer deny your snowed roof when it is hanging low.

Let me give you the Reader’s Digest version of this analysis. The relevant policy language is fairly standard in most homeowner policies. The language regarding “collapse” caused by a “windstorm” is significant to this claim. “Collapse” is usually excluded under many insurance policies. However, it is then granted back as an additional coverage because it is “excepted” out of exclusions. This exception to the exclusions only happens if the “collapse” is caused by certain causes. One of those causes is “windstorm.” If a “hurricane” is a “windstorm,” and hurricanes are a combination of wind and flood, the logical reading of the policy is that hurricanes that cause complete destruction will provide coverage because the collapse language excepts the damage out of the “flood” exclusion.

Here is the relevant language from a standard State Farm policy:

SECTION I – ADDITIONAL COVERAGES

* * *

11. Collapse. We insure only for direct physical loss to covered
property involving the sudden, entire collapse of a building or any
part of a building.

Collapse means actually fallen down or fallen into pieces. It does
not include settling, cracking, shrinking, bulging, expansion,
sagging or bowing.

The collapse must be directly and immediately caused only by one
or more of the following:

a. perils described in SECTION I – LOSSES INSURED,
COVERAGE B – PERSONAL PROPERTY. These
perils apply to covered building and personal property for
loss insured by this Additional Coverage;

* * *

SECTION I - LOSSES INSURED

COVERAGE A – DWELLING

We insure for accidental direct physical loss to the property described in
Coverage A, except as provided in SECTION I - LOSSES NOT
INSURED.

COVERAGE B – PERSONAL PROPERTY

We insure for accidental direct physical loss to property described in
Coverage B caused by the following perils, except as provided in
SECTION I – LOSSES NOT INSURED:

* * *

2. Windstorm or hail. This peril does not include loss to property
contained in a building caused by rain, snow, sleet, sand or dust.
This limitation does not apply when the direct force of wind or hail
damages the building causing an opening in a roof or wall and the
rain, snow, sleet, sand or dust enters through this opening.

** *

SECTION I - LOSSES NOT INSURED

 1. We do not insure for any loss to the property described in
Coverage A which consists of, or is directly and immediately

caused by, one or more of the perils listed in items a. through n.
below, regardless of whether the loss occurs suddenly or gradually,
involves isolated or widespread damage, arises from natural or
external forces, or occurs as a result of any combination of these:

a. Collapse, except as specifically provided in SECTION I
ADDITIONAL COVERAGES, Collapse.(emphasis added)

* * *

2. We do not insure under any coverage for any loss which would not
have occurred in the absence of one or more of the following
events. We do not insure for such loss regardless of: (a) the cause
of the excluded event; or (b) other causes of the excluded event; or
(c) whether other causes acted concurrently or in any sequence
with the excluded event to produce the loss; or (d) whether the
event occurs suddenly or gradually, involves isolated or
widespread damage, arises from natural or external forces, or
occurs as a result of any combination of these:

* * *

c.Water Damage, meaning:

Flood, surface water, waves, tidal water, tsunami, seiche, overflow of a body of water, or spray from any of these, all whether driven by wind or not;

* * *

3. We do not insured under any coverage for any loss consisting of one or more of the items listed below. Further, we do not insure for loss described in paragraphs 1. and 2. immediately above regardless of whether one or more of the following: (a) directly or indirectly cause, contribute to or aggravate the loss; or (b) occur before, at the same time, or after the loss or any other cause of the loss:

* * *

c. Weather Conditions

However, we do insure for any resulting loss from items a., b., and c. unless the resulting loss is itself a Loss Not Insured by this Section.

* * *

Although a loss caused by “collapse” is listed under subsection (1) of “Losses not
Insured,” that portion of the policy tells the insured that coverage will be afforded if the
contingencies of the policy’s additional coverage for “collapse” are triggered. That
additional coverage is triggered if the “collapse” involves the sudden entire collapse of a
building or a part of a building. The policy’s “collapse” coverage must also be caused by
certain enumerated actions. In the case of a policyholder that has been “slabbed,” it is undisputed that their property was reduced to a slab, or that the insured dwelling sustained a “collapse,” as that term is defined in the policy. It is also undisputed that the “collapse” of such an insured home was caused by one of the required events listed in the policy, a peril described in Section 1 – “Losses Insured, Coverage B – Personal Property.” According to the policy, State Farm’s “collapse” coverage is triggered by a “windstorm.” In this case, the loss was caused by a “windstorm” event, Hurricane Katrina. State Farm’s insured is, therefore, entitled to rely upon the policy’s additional coverage for “collapse” as an alternative theory to obtain benefits.

It is important to note that the “water damage” exclusionary language is found under Subsection (2) of the policy’s “Losses not Insured.” The introductory language of Subsection (2) contains State Farm’s notorious, “anticoncurrent causation” clause. The policy’s “collapse” provision is grounded under Subsection (1)’s “Losses not Insured” language, and the authority to add the coverage back in is found there.

As Subsection (1) contains different lead-in language, with a much different level of exclusionary authority, it does not make sense for the policy’s Subsection (2) lead-in language to apply to a “collapse.” Essentially, the provisions conflict, creating an ambiguity with respect to the additional “collapse” coverage. Courts routinely hold that conflicting language must be interpreted in the policyholder’s favor. Accordingly, the lead-in language of Subsection (2) and its resulting “water exclusion” cannot be used to defeat coverage in any way.

Importantly, the policy must be read as a whole, and all policy provisions must be harmonized. The additional coverage for “collapse” allows coverage for a “windstorm,” not just for “wind.” Yet, if State Farm (or any other insurer) is allowed to apply the anti-concurrent causation language and/or its “water damage” exclusion to the additional “collapse” coverage, the coverage for “windstorm” would be illusory and meaningless. See York Ins. Co. v. Williams Seafood of Albany, Inc., 544 S.E.2d 156 (Ga. 2001) (explaining, under Georgia law, that an insurer cannot rely upon an exclusion contained in a separate section of the policy as a way to defeat coverage for an additional coverage provision, when the applicability of the exclusion would render the additional coverage meaningless).

Further, if the “water damage” exclusion and the “anti-concurrent causation” clause were to apply under the circumstances of a “slabbed” structure, there would be no need to have the additional coverage for “collapse” caused by “windstorm.” The provision would be meaningless and illusory.

A “windstorm” typically implicates and involves some type of water damage when the windstorm is a hurricane. Similarly, in this instance, the coverage obligation for “windstorm” creates, at best from State Farm’s view, an ambiguity when looking at the exclusionary language at hand. State Farm chose its words carefully, recognizing that a “windstorm” is different than loss caused from “abnormally fast wind.”

If State Farm and other insurers wanted to exclude “collapse” from the flood waters of a hurricane and keep the “collapse” language from “excepting” out the “anti-concurrent” loss language, it should have written the policy in that manner. I think nobody thought about how the “collapse” peril as an exception to the exclusions would apply to a hurricane with storm surge. I predict the ISO and other carriers writing their own standard forms will change the language in the future just to prevent policyholder attorneys from noting this claim to coverage.

I am certain our draft brief can be improved upon. For others who make this argument, please send us whatever you write.