December 9, 2004

Soggy building? Better check your insurance

  • Recent court case draws new lines in interpreting the meaning of ‘collapse' in property insurance policies.
    Marston Heffernan Foreman


    During the last decade, real estate developers have been able to use their property insurance policy's coverage for "collapse" due to hidden decay to finance repairs of buildings damaged by water intrusion.

    This coverage has been a boon to policyholders and a curse to insurers. The fight is not over.

    The Forest Lynn case

    The Federal Court for the Western District of Washington started the stampede of claims in 1994 in its decision in Forest Lynn Homeowners Assn. v. Allstate Ins. Co. It held that the meaning of "collapse," when the term is undefined in the policy, means "substantial impairment of structural integrity."

    The court rejected Allstate's assertion that the structure had to fall down before coverage applied.

    While this decision clearly broadened coverage, it did little in terms of giving direction to engineers, architects, claims representatives, attorneys and courts as to how to determine "substantial impairment of structural integrity."

    The insurers' responses to Forest Lynn varied. Some paid claims if their experts determined that any part of the building could not support Uniform Building Code required loads. Others argued that a building was in a state of collapse only if their experts determined that the Uniform Code for Abatement of Dangerous Buildings applied.

    Many insurers changed their insurance policies and defined collapse to mean that the structure had to fall down.

    The Wall case

    The war has continued to rage. Many insurers ignored adverse legal authority, such as Forest Lynn, and told their experts that in order for coverage to apply, they had to find that the structure was in a state of imminent collapse.

    There was no policy definition or Washington court decision applying "imminent collapse," but the insurers used it by arguing that Forest Lynn and its progeny of cases were not binding authority because they were not decisions in the state court system.

    The most recent battle was fought last summer in 9th U.S. Circuit Court of Appeals — Assurance Co. of America v. Wall & Assoc. LLC. The court interpreted a policy that did not include a definition of collapse. It held that the policy "provides coverage not only for actual collapse but also for imminent collapse."

    The court closely examined the policy language and held that the use of the terms "risk of" and "involving," in relation to "collapse," broadened the coverage beyond actually falling down. The court noted that most jurisdictions applied the "substantial structural impairment standard," but did not reject that standard or apply it to the case.

    The ruling gives absolutely no direction to the professionals handling these claims as to how to measure "imminent collapse" or as to the circumstances where "substantial structural impairment" applies. Insurers have begun to hail it as a victory because the court used the term "imminent collapse," while policyholder lawyers were pleased with the court's affirmation that actual collapse is not necessary to trigger coverage.

    The war will continue. Because the holding was not instructive as to the standard for determining "imminent collapse," insurance professionals will be looking to the court's description of the facts and its analysis of existing case law for guidance.

    The case originally arose out of damage claims due to water intrusion at Percival Plaza, which is owned by Wall & Associates LLC of Olympia. Percival Plaza consisted of two buildings constructed with steel columns and steel beams with attached wooden exterior wall framing studs covered by exterior-grade gypsum sheathing. The buildings were sided in an exterior insulation and finish system (EIFS) with a decorative brick façade that was attached with an adhesive to the EIFS outer layer.

    An architect and a construction repair specialist investigated leaks at Percival Plaza. Extensive testing revealed that the water intrusion problems resulted in significant decay and deterioration to the buildings.

    The court described the damage as: "The gypsum sheathing had turned to mush, leaving only the paper facing intact, which provided the sole support for the EIFS. (This) created a serious risk to passersby as the EIFS was in danger of completely falling off the building."

    In its analysis, the court examined Panorama Village Condo Owners Ass'n. v. Allstate Ins. Co., noting that the Washington Supreme Court came close to defining "collapse" when it stated "that a loss could occur either when the building actually collapsed or when the decay posed a risk of collapse."

    The Wall court said that "The (Panorama) court implied that Washington law does not require actual collapse in policies providing coverage for risk of direct physical loss involving collapse of a covered building or any part of a covered building."

    The court also examined and found instructive a Washington Court of Appeals case, Mercer Place Condo. Ass'n. v. State Farm Fire & Cas. Co. While not directly interpreting "collapse," Mercer Place recognized that a "majority of jurisdictions have assigned the more liberal standard ‘substantial impairment of structural integrity,' to the use of ‘collapse' in insurance policies."

    What does it mean?

    The short-term implication of the Wall decision will be that policyholders with policies lacking a definition of "collapse" will still have coverage if their policy language uses the words "risks" and "involving." The Wall decision has no impact on policies that specifically limit the coverage to actually falling down.

    The longer term implication will be that insurers will change their policy language and remove the words the Wall court identified as broadening coverage. In the meantime, insurers will try to limit the use of favorable policy language by denying claims unless their experts say that the building, or any part of it, could fall down under existing conditions.

    Policyholder alert

    Because collapse coverage can evaporate with an amendment to a policy, policyholders should have an insurance professional review their existing policies to determine if they contain the favorable collapse language.

    Virtually all property policies contain a suit limitation clause that essentially bars all claims unless the insurer is sued within two years from the date of damage, and in some instances, within one year. The limitation period does not start until damage is observed, but the sooner the claim is made, the greater likelihood that the applicable policy has the favorable language.

    The other alternative is to hope that the insurers are consistent in their arguments and take the position that Wall does not apply because it is in the federal court system. The chances of that are slim to none.

    The Wall case falls short of the cure-all that some may attribute to it. It merely recognizes potential collapse coverage for damaged property in any condition between "substantial impairment" and "actual collapse."

    Linda Foreman, a member of Marston Heffernan Foreman, specializes in representing insurance policyholders. She was the plaintiff's attorney in Forest Lynn v. Allstate.

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