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 Additional Coverages to Consider

When adjusting a collapse loss, other policy coverages should also be considered.

• Debris Removal. Ordinarily, the expense incurred by the insured for debris removal is included in the limit of liability that applies to the damaged property. However, if the amount to be paid for the actual damage to the property plus the debris removal expense is more than the limit of liability for the damaged property, an additional 5% of that limit is available for such expense.

• Reasonable Repairs. The insurer agrees to pay the insured the reasonable cost incurred by the insured for the necessary measures taken solely to protect covered property that is damaged by a Peril Insured Against from further damage. This additional coverage does not increase the limit of liability that applies to the damaged property. The additional coverage is meant to encourage the insured to mitigate a loss and reduce physical damage sustained or Additional Living Expenses incurred.

• Property Removed. The insurer may also agree to cover property against direct loss from any cause while being removed from a premises endangered by a Peril Insured Against and for no more than 30 days while removed. Again, this additional coverage does not increase the limit of liability that applies to the damaged property.

Strategies and Suggestions for Handling Collapse Claims:

What emerges from the policy language and case law are considerations driven largely by the facts of each claim and the policy language at issue. The following reflect some considerations when responding to collapse claims:

• Did the loss involve collapse? A simple question, but imminent collapse is not collapse in the majority of jurisdictions. Nor is settling, cracking, shrinking, bulging or expansion.

• Physical damage to covered property from the weight of ice and snow that is not collapse may be covered loss.

• When in doubt, reserve your rights or secure a non-waiver agreement from the insured.

• Although it is hard to discount the role snow and ice play in any given roof collapse scenario, steps should be taken to identify and document other contributing factors such as rot, decay, or faulty maintenance since most often the additional coverage for collapse applies on only a limited, named perils basis.

• Get the right consultants on board. Identifying the cause and origin of the collapse as well as making a coverage determination in more complex scenarios are critical to the loss adjustment process. Make sure your consultants give you objective advice and aren’t simply telling you what they think you want to hear!

• Prompt coverage determinations can minimize your total exposure. If coverage applies and the policy affords time element or ALE, prompt conclusion of the loss adjustment process can minimize the value of these types of claims

• Evaluate other additional coverages. If you have a covered loss, coverage for debris removal and reasonable repairs may apply. Funding preventative measures or temporary repairs can prevent further damage to covered property and avoid coverage issues related to neglect.

So good luck and keep shoveling!

The insurer argued that there could be no “collapse” because the building was still standing even though there was evidence of “a downward movement of several inches in the hotel caused by an abrupt snapping of the trusses.”  The insured responded that the incorporation of a habitability requirement in the definition of “collapse” (“… with the result that the building … cannot be occupied…”) necessarily suggested that something short of a complete falling to the ground could qualify as a collapse.  Because the alleged “collapse” had rendered some rooms unsafe and unusable, the insured argued that there was sufficient evidence for a jury to find that a covered “collapse” had occurred.  The Court agreed with the insured, noting that the habitability requirement “stands as a proxy for a substantial impairment of integrity by adding a life and/or safety element to the definition.”

The Malbco Court distinguished a prior “collapse” decision by the Oregon District Court, Association of Unit Owners of Nestani v. State Farm, 670 F. Supp. 2d 1156 (D Or 2009), wherein summary judgment was granted for the insurer.  The policy at issue in Nestani defined “collapse” as “actually fallen down or fallen into pieces” and, importantly, did not include any habitability requirement.  The dichotomy between these two decisions – Malbco and Nestani – re-affirms the importance, especially in Oregon, of focusing on the particular policy language at issue rather than relying upon general standards for general categories of alleged losses.

While some may criticize Hennessy as a liberal interpretation of “collapse” coverage, see dissenting opinion by Judge Landau (“I respectfully disagree with the majority that what is essentially a crack between a piece of stucco and the building to which it is adhered is a ‘collapse’ of that stucco”), the decision also represents a substantial victory for insurers with respect to the scope of coverage. Specifically, whereas the trial court had awarded the insured $98,859.03 to entirely replace the failed stucco system, the Court of Appeals reduced the award to $2,469.68 to reflect only those costs directly associated with repairing the “collapsed” portion of the stucco. Even though the parties had agreed that it was “reasonable and prudent” to replace all of the stucco that “was no longer attached to the underlying walls,” the court found that no “collapse” had occurred where the stucco was no longer properly adhered to the building but “had not moved or fallen.” Thus, repairs to those areas of the building were not necessitated by any “collapse” but by the hysteresis (grout decay) that had caused the adhesion to fail.

Prior to the Hennessy decision, insureds repeatedly argued in Oregon that once coverage is found the insurer must pay for all work that is necessary to complete the repair job in a “good and workmanlike fashion.” Thus, if, as the parties agreed in Hennessy, it was “reasonable and prudent” to repair all stucco while repairing the portion that had actually separated from the building, the insured would argue that the entire repair project should be covered. Hennessy stands for the proposition that although a broad scope of work may be “reasonable and prudent,” or even required in order for a contractor to complete the job in a workmanlike manner, coverage only extends to those repairs actually necessitated by a covered event. "Logically, this rule should not be limited to "collapse" claims but should extend to all first-party property claims, and potentially even to third-party liability claims. In most cases, a reasoned expert opinion will likely be helpful to properly limit an insured’s recovery pursuant to the Hennessy standard.
 

The owners of a building in Brookly were ordered to vacate it by the New York Department of Buildings after hidden decay was found to have damaged a structural party wall.   Harleyvsville disclaimed coverage on the grounds, among others, that there had not been a collapse.  The U.S. District Court agreed, declaring that under New York law, a building must have suffered near or total destruction to have "collapsed."

On appeal, however, the Second Circuit declared that there was a conflict in the opinions of intermediate appellate courts in New York as to whether a building must have suffered "near or total destruction" to be covered or wheher coverage could arise due to a mere "substantial impairment of the structural integrity" of the building. In the absence of any clear statement by New York courts, the Second Circuit held that the language was ambiguous as being capable of two reasonable interpretatoins.

The Second Circuit also rejected Harleysville's contention that the policy required that the damage result from a "sudden" destructive force.   The court noted the policy covered "hidden decay," which was unlikely to ever occur suddenly.

In May of 2002, the insureds sought coverage under a policy’s “collapse” provision after they learned that “hidden decay” had progressed to such a point that their home was in danger of an imminent collapse. Fabozzi, 2009 U.S. Dist. LEXIS 1109, at *7. Lexington sent a representative to investigate the claim, and the insureds alleged that the representative had assured them that the claim was covered and would be paid. Id., at *8. However, about two weeks later, Lexington sent a letter to the insureds advising them that an investigation was being conducted and that the company was reserving all of its rights under the policy. Id. at **8-9. The insureds asserted that over the next two-and-a-half years they repeatedly contacted their insurance broker who continued to reassure them that “Lexington is a good company,” and the claim would be paid. Id., at **10-11.

In October of 2004, the insureds filed suit against Lexington, alleging that it breached the insurance contract by failing to pay the claim. Id., at *13. In response to Lexington’s argument that the suit was barred by the policy’s two-year limitation on suits clause, the insureds argued that the “two-year limitation period did not begin to run until July 2003, after the cause of damage was determined.” Id., at *14. The Court reviewed case law from 1856 through 2008 in an attempt to determine when the two-year period commenced running. The review included a 1992 case wherein a New York court had held that a similar limitation of suits clause “did not begin to run until the full extent of the loss was known.” Id., at *20. However, the Court found that in more recent cases, “New York courts appear to have abandoned the rigid approach that underlay the ancient cases … in favor of a more flexible approach that considers the plain meaning of the contractual language.” Id., at *21. Accordingly, the Court applied the limitation of suits clause according to its plain language and held that the claim was time-barred. Id., at *22.

With respect to the insureds’ estoppel argument, the Court held that the letter Lexington sent to its insureds about two weeks after the Lexington representative visited the insureds’ home, “undercut any assurances that [the insureds] may have previously received.” Id., at *8. Moreover, due in part to the insurance broker’s reference to Lexington as a third-party, the Court held that the insureds “either knew or should have known that [they] could not rely on assurances” from the broker. Id., at *25. At the very least, the Court noted, the insureds should have realized that the claim would not likely be paid when Lexington took one of the insured’s depositions, prior to the litigation and prior to expiration of the two-year limitation period, that included several questions “which suggested Lexington’s belief that [the insured] had not given prompt notification of the damage.” Id., at *26.