National Insurance Law Forum : Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

I've spent much of the last two weeks flying around the country (as we "speak", I'm at O'Hare) and have consistently been surprised by how much of the ground beneath my plane is blanketed with snow!  

From the collapsed roof of the Metrodome in Minneapolis to the ice and snow that threatened to cancel last week’s Super Bowl, this year’s winter has taken a heavy toll. Nowhere has snow been a bigger problem than the Northeast, however, where the accumulated weight of several snowstorms since Christmas threatens roofs throughtout the region. As roofs weaken and collapse throughout the region, insureds are seeking coverage for their losses under homeowner’s and commercial property policies.  I asked my partner Bill Schneider, who heads up our first party group and is a smart guy to boot (CPCU, etc.) for some practical tips on how insurers should be looking at these claims.  Here are his thoughts:

Collapse claims present a variety of challenges to the loss adjustment process. Besides issues of coverage, collapse claims are extremely time sensitive because of the inherent danger of unstable buildings and the risk of further damage to covered property. Prompt coverage determinations and mitigation efforts can serve to expedite the loss adjustment to reduce ALE or business time element coverages. Accordingly, it is important to have a good understanding of the coverage and systematic approach in place to handle these losses.

Coverage for loss caused by collapse varies from coverage form-to-coverage form and from state-to-state. The following is intended to serve as a general overview about the peril of collapse and a discussion of the more common issues that arise in collapse loss scenarios.

Coverage for Collapse

Ordinarily, damage from collapse is excluded from the risks of direct physical loss insured by Coverage A in the standard homeowners insurance policy, as well as commercial property cause of loss forms such as the CP 10 30. However, most policies provide some form of additional coverage for loss caused by the peril of collapse, which applies on a limited, named perils basis only. For example, the Additional Coverage for collapse available in both the HO3 (04 91) and HO3 (10 00) forms, provide coverage for collapse caused by the weight of ice, snow and sleet, the main cause of the many recent roof collapses in New England. Similarly, most business and commercial property insurance policies will respond to collapse that results from the weight of ice and snow.

A threshold consideration is whether a collapse has actually occurred. Only where the loss is found to have resulted from the peril of collapse may an insurer rely on the exclusion and turn to the provisions of the additional coverage to determine its coverage obligations. In an “all risk” context, damage from the weight of ice and snow that does not involve collapse may very well be covered.

Check the Policy Form

When evaluating coverage for a collapse claim it is important to determine the specific policy form that governs coverage. For example, the HO3 (04 91) form does not define the term “collapse.” Instead, it only provides that “[c]ollapse does not include settling, cracking, shrinking, bulging or expansion.” Because there was no clear definition about what constituted “collapse” under this policy form, courts called upon to interpret the term collapse reached varying results. Some courts found the term unambiguous and ruled that collapse involves both a temporal element of suddenness and a visual element of altered appearance. Others concluded the term was ambiguous and held that mere "substantial impairment of the structural integrity" of a building is sufficient to constitute collapse.

ISO responded with additional structure and clarity for the peril of collapse in its newer property forms. For example, the 2000 edition of the HO3 policy form, as well as later versions of the CP 10 30 and standard Businessowners policy, more fully described what is and is not a collapse. This newer language provides that collapse is 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.” It further set forth circumstances that did not constitute collapse. Because the newer forms define collapse, older case law that interpreted the prior coverage forms does not offer much guidance to claim professionals evaluating coverage. Courts will hopefully construe the plain language of the newer collapse provisions to require that a building abruptly fall down or cave in to qualify as a collapsed building for purposes of coverage.

 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!

 

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2003, 2004, 2005 – (Happy new year!)  It is difficult to keep up with that Mike Aylward – especially when he is in a reminiscing-kind of mood. But I have to add my two cents, in addition to Mike’s list, of important California decisions from these three years because of their long-lasting impact, mainly in the area of policy interpretation. Of these, 2005 was the watershed year when a number of decisions from California’s Supreme Court were based on strict and literal policy interpretation.

2003

• First party property policy with coverage for actual collapse did not cover imminent collapse – the court could not rewrite the parties’ contract. Rosen v. State Farm Gen. Ins. Co. (2003) 30 Cal.4th 1070.
• Intentional misconduct may be excluded from coverage, but still may require duty to defend (depending on policy language and whether exclusion based on Ins. Code § 533). Marie Y. v. General Star Indem. Co. (2003) 110 Cal.App.4th 928.

 

2004

• One that does not fit with the others summarized here is a decision that the underlying indemnity agreement must be considered along with the insurance policy provisions when determining indemnity and contribution rights. Hartford Cas. v. Mt. Hawley Ins. Co. (2004) 123 Cal.App.4th 278.

2005

• Whether there is an obligation to pay defense costs under umbrella policies when there is no duty under the underlying primary policies because there is no “suit” depends on the policy’s language - in particular the insuring agreement and definition of ultimate net loss. Powerine v. Superior Court (2005) 37 Cal.4th 377; County of San Diego v. ACE Property & Cas. Co. (2005) 37 Cal.4th 406.
• The pollution exclusion still does exclude coverage, here silica dust, in the wake of MacKinnon. Garamendi v. Golden Eagle Ins. Co. (2005) 127 Cal.App.4th 480.
• Even with California’s efficient proximate cause law which decidely favors policy-holders, a weather conditions exclusion in a property policy precluded coverage. Julian v. Hartford Underwriters (2005) 35 Cal.4th 747.

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In Terminal Freezers Inc. v. U.S. Fire Ins., 2009 U.S. App. LEXIS 20321, an unpublished opinion issued on September 11, 2009, the Ninth Circuit Court of Appeals employed Washington law to examine the meaning of the undefined term “ice” as used in an “all risk” property insurance policy. In Terminal Freezers, the plaintiff, who runs a cold storage facility, made a claim for loss under three commercial “all risk” property insurance policies issued by U.S. Fire when areas of the facility were damaged by ice. U.S. Fire denied the claim. See Terminal Freezers, Inc. v. U.S. Fire Ins., 2008 U.S. Dist. LEXIS 48280 (W.D. Wash. June 23, 2008). Terminal Freezers’ claim involved two freezer warehouses, and the parties agreed that their construction was deficient in several respects, including that vapor retarders were not properly installed and caused excessive ice formation. Id. The district court granted U.S. Fire’s summary judgment motion brought on the grounds that the policy’s faulty workmanship exclusion precluded coverage, and that there is no coverage for damage caused by ice. Id.

On appeal, the Ninth Circuit, considered two questions in determining whether the insurance contract should cover the loss: first, which single act or event is the efficient proximate cause of the loss; and second whether the efficient proximate cause of the loss is a covered peril, noting that the efficient proximate cause is the predominant cause which sets into motion the chain of events producing the loss. The Ninth Circuit agreed with the district court’s conclusion that, based on an expert’s undisputed finding that “the excessive ice formation . . . [was] the result of a poorly installed vapor retarder,” and the policy, which precluded coverage for “loss or damage caused by or resulting from . . . [f]aulty, inadequate or defective . . . workmanship,” the faulty workmanship was the efficient proximate cause of the facility’s excessive ice formation, and that faulty workmanship is not a “covered peril” under the policy.

The policy did provide coverage, however, if faulty workmanship led to a “covered cause of loss.” Thus, even though the efficient proximate cause of Terminal Freezers’ loss was a poorly installed vapor retarder, Terminal Freezers could recover if the policy covered whatever resulted from the faulty vapor retarder--in this case, ice. While the policy specifically excludes ice as a covered cause of loss, it does not define the term. Terminal Freezers argued, relying on the canon of noscitur a sociis, a rule of interpretation that states that the meaning of unclear language in a contract or other legal document should be construed in light of the language surrounding it, that the policy only precludes ice in its “natural” form because the words surrounding “ice” in the policy - rain, snow, sleet, sand, and dust - are “natural” elements.

Following Washington’s rules to interpret the terms of an insurance contract, the Ninth Circuit declined to resort to canons of construction when the language of a contract is clear. If a term is undefined, Washington courts rely on the term’s ordinary meaning, and may look to dictionary definitions to determine that ordinary meaning. The Ninth Circuit determined that, as commonly used, and as defined in a dictionary, ice is “water reduced to the solid state by cooling . . . .” Apparently finding no support for Terminal Freezers’ contention, the Ninth Circuit noted that “[t]hat is the end of the inquiry.” Declining to modify the insurance contract to create ambiguity where none exists, the Ninth Circuit affirmed the district court’s finding of no coverage and grant of summary judgment to U.S. Fire.
 

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Clarifying several rulings on coverage for construction defects, South Carolina’s Supreme Court ruled this week that a trial court did not err in determining that a CGL policy covered damages awarded to a homeowner in an arbitration against an insured contactor for water intrusion related to negligent application of stucco by a subcontractor. The court first clarified prior decisions and found that an “occurrence” is present where defective construction results in property damage. The court acknowledged that there was some confusion in the trial courts as to the difference between an “occurrence” of alleged negligent construction from negligent construction resulting in an “occurrence.” The court concluded that although “the stucco subcontractor’s negligent application is not on its own sufficient to constitute an “occurrence,” we find that . . . the continuous water intrusion into the home resulting from the subcontractor’s negligence qualifies as an “accident” involving “continuous or repeated exposure to substantially the same harmful conditions.” The court additionally rejected the insurer’s argument that the water intrusion damages were excluded under the policy as “expected or intended” damages as the insured contractor certainly did not intend for its subcontractor to perform negligently. Finally, the court allowed for recovery under the policy for that portion of the arbitration award concerning removal and replacement of the stucco stating this was necessary in order to remedy the extensive water intrusion damage behind the stucco and was therefore associated with remedying covered property damage.

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Not one to get left behind while the Fifth Circuit and other Gulf Coast states make all the first party law on concurrent causation, the New Hampshire  Supreme Court has issued a new opinion upholding a flood exclusion in a homeowner's policy.

 

The claims in Bates v. Phenix Mut'l Ins. Co.,  2007-177 (N.H. February 18, 2008) involved damage to the insured's real and personal property after a culvert above the insured's house gave way following a period of extremely heavy rain, deluging the insured's property.  Phenix Mutual denied coverage on the basis of the flood exclusion in its policy, a position that was upheld by a state trial court in the ensuing coverage liltigation.

On appeal to the New Hampshire Supreme Court, Bates argued that the failure of the culvert and the resulting collapse of the roadway was a covered "explosion" under the policy because it was caused by a "sudden release of energy in the form of movement of water."  The trial court had rejected this argument but further found that any resulting coverage was defeated by the water exclusion in the policy.  The Supreme Court agreed.

Exclusion G to the policy stated that the policy excluded "loss or damage caused directly or indirectly" by water "regardless of any other cause or event that contributes concurrently or in any sequence to the loss."   Since the insured conceded that water was at least an indirect cause of this loss, the Supreme Court declared that Exclusion G barred coverage.

Further, the court refused to find that the release of water caused an explosion within the ensuing loss provision of the exclusion.   The Supreme Court agreed with the trial court that applying "the ensuing loss provision to provide coverage for what is essentially a flood would subvert the intent of the parties."  In any event, the court observed that the actual damage complained of by the insured was not for damage due to an explosion (e.g.  flying rocks or debris).

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