Collapse Coverage: Is Coverage Triggered When the Building Shows Signs Of Distress, When Collapse Is Imminent, Or When It Crumbles To The Ground?

Cases around the country discuss property loss resulting from collapse. The issue is often litigated because collapse is usually a process that occurs over time and to various degrees. See Sherman v. Safeco Ins. Co. of Am., Inc., 716 P.2d 475, 476 (Colo. App. 1986) (where masonry work supporting the sill plate had cracked causing complete release of the sill plate, roof had fallen more than two and one-half feet producing a marked sag in the roof line, upper tiers of bricks on the two supporting walls had fallen out and the walls were bowed out, the condition was, as a matter of law, a “collapse” within the meaning of that term in the insurance policy).

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.