Ambiguous Grant Of Collapse Coverage Construed In Policyholder’s Favor

Invoking the familiar insurance contract interpretation doctrine of California and other jurisdictions, that truly ambiguous policy wording must be construed against the insurer drafting it, the U.S. District Court for the Eastern District of California decided on August 16, 2018 that coverage for “abrupt collapse” of a building was not limited to losses where the insured building has fallen to the ground. Rather, it includes situations where the building ceiling and its attached equipment have dropped nearly a foot in height, and ceiling tiles and a layer of insultation have fallen onto furnishings below.

The decision, Hoban v. Nova Cas. Co., is reported at 2018 U.S. Dist. LEXIS 139116, and involved the failure of two trusses supporting the roof of a bowling alley in Madera, California. These failures caused the ceiling of the building to drop approximately 6 to 10 inches below its as-built elevation, resulting in the Madera County government immediately ordering the business closed for public safety reasons until repairs could be made.

The bowling alley owners, plaintiffs Patti and Terry Hoban, were insured by a commercial insurance policy issued by defendant Nova Casualty Company. In ruling on cross-motions for summary judgment, the court stated that, while damages caused by collapse are typically excluded from insurance coverage, plaintiffs purchased “additional” coverage specifically to provide protection in the event of collapse. The key to the grant of collapse coverage, found in an endorsement titled “Additional Coverage – – Collapse,” was that it applied only to an “abrupt collapse as described and limited in” the endorsement. The endorsement, in turn, defined the phrase “abrupt collapse” as meaning “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 intended purpose.”

The endorsement adding collapse coverage explicitly stated that it did not apply to a building, or any part of one, in danger of falling down or caving in, or to a part of a building still standing after a loss, even if it has separated from another part of the building, and even if the building shows evidence of cracking, bulging, sagging, bending, leaning, settling, shrinkage or expansion.

After investigating the cause of loss, the insurer retained a lawyer to provide it with a coverage analysis. The lawyer told the insurer that the policy’s collapse coverage did not apply to plaintiffs’ loss because the roof had not collapsed. The insurer denied the insurance claim, asserting that because the ceiling and roof of the building had not fallen down there had been no collapse. Therefore, the insurer contended that the collapse coverage did not apply at all to plaintiffs’ loss. The same argument found its way into the insurer’s motion for summary judgment, and in defense of plaintiff’s cross-motion for the same relief. In brief, the insurer argued that the additional coverage provision for collapse did not apply in this case because the insured building still stood and had not fallen to the ground.

The court noted that in a diversity of citizenship case such as this one applying California law, the court’s role in construing the insurance contract is to discern how the California Supreme Court would apply the “abrupt collapse” definition to the essentially undisputed facts of the loss. If the state’s highest court had not adjudicated the issue, a federal court must make a reasonable determination of the result the highest state court would reach if it were deciding the case.

Although the California courts have litigated collapse insurance coverage issues with some frequency, creating a split in authority, the extent of collapse coverage, the court noted, depends on the precise policy language, so cases interpreting collapse provisions with language different from the policy in this case, or that leave the term “collapse” undefined, were of limited utility in aiding this court to make a decision.

Accordingly, the court resorted to the general principles of insurance policy interpretation under California law, starting with the rule requiring a court, first, to resort to the language of the contract in order to ascertain its plain meaning or the meaning a lay person would ordinarily attach to it, making it consistent with a policyholder’s reasonable expectations. The goal in construing an insurance policy is to give effect to the parties’ mutual intention, and the terms of a contract are ambiguous if they are susceptible of more than one reasonable interpretation. Contract language must be interpreted as a whole and as applied to the factual circumstances of the case. The contract terms must not be found ambiguous in the abstract. Most importantly in this case, ambiguities in coverage provisions interpreted by California courts are construed against the insurance company.

The court concluded that the language of this policy was ambiguous because there was more than one reasonable interpretation of its intended meaning regarding collapse. One reasonable meaning of the phrase “caving in,” the court said, “is defendant’s understanding: that the building has completely collapsed to the ground.” The court noted that the policy did “attempt to differentiate between a building that has suffered an ‘abrupt collapse’ and one that is standing.” This suggests, the court stated, that even though the policy does not unambiguously require it, the building or part of the building must collapse completely to the ground for coverage to exist.

The court pointed out that in common parlance a building can “cav[e] in . . . with the result that the building . . . cannot be occupied for its intended purpose . . . by having its roof or ceiling fall an appreciable distance, even if the building as a whole has not completely collapsed to the ground.” As put another way by the court, [n]othing in the policy unambiguously informs the policyholder that, to be covered, the building or a part of it must fall completely to the ground.

The court carefully examined the insurer’s word choice in order to shed light on whether to suffer a collapse the insured building must completely fall down or flatten. The crucial phrase used in the policy is “abrupt collapse,” which the court observed highlights the manner in which the collapse must occur to warrant coverage. By contrast to this “temporal element,” the policy did not use the term “complete collapse,” which would refer the reader to the degree of collapse required for coverage. With coverage applying to the “abrupt” collapse of either “a building” or “any part of a building” the court thought the policy wording strongly suggested the policy was intended to cover a partial collapse of a part of a building, so long as it occurred abruptly, “not only total or complete collapse.”

In a related use of word logic, the court observed that “specifying that the collapse must render the building or part of the building so that it ‘cannot be occupied for its intended purpose’ [is language] that would be unnecessary and redundant if the policy required the building or part of the building to have collapsed to the ground. A building or a part of building that has collapsed to the ground cannot be occupied for any purpose, or at all, let alone for its intended purpose, so to require collapse to the ground would render the actual policy wording – that the collapsed building cannot be occupied for its intended purpose – to be mere surplusage. “[C]ontracts, the court said, are usually interpreted to avoid [such] redundancy.”

The court recited evidence establishing the predicate for coverage based upon the partial collapse of features of the building. The court noted that it was undisputed that the overhead monitors of the bowling alley fell 6 to 10 inches in elevation, and that ceiling tiles and insulation fell to the table tops and counters below. The court stated, “These constitute “any part of a building” that has “fall[en] down.” It was also undisputed that the business was closed at the order of the County of Madera for public safety reasons until repairs could be completed, so neither the building nor any part of it could be occupied for its intended purpose. Accordingly, the court held, there is no genuine dispute of material fact about whether a part of the building fell down and whether the building could be occupied for its intended purpose. Finally, based upon the policy language stating that coverage does not extend to parts of building understanding “even if it shows evidence of cracking, bulging, sagging, pending, leaning, settling, shrinkage or expansion,” the court found that this language could be reasonably understood as intending to exclude coverage for any regular maintenance costs, and not as requiring a complete collapse for coverage to exist. To rule otherwise, the court said, would transform the policy into a maintenance agreement. Here the building was in a state of collapse, well beyond the point at which ordinary maintenance would be called for.

Plaintiffs sued their insurer for not only breach of contract, but also for breach of the implied covenant of good faith and fair dealing, but this claim was rejected based on the genuine dispute doctrine. This doctrine holds that where there is a genuine dispute over coverage, or the amount of loss, an insurer’s denial of benefits gives rise to tort damages only if the insured shows the denial or delay was unreasonable. As a corollary of that principle, California courts hold that a genuine dispute exists only where the insurer’s position is maintained in good faith and on reasonable grounds. Here it was found that it was undisputed that the building did not completely collapse to the ground, which under the insurer’s interpretation would mean there was no coverage under the policy.

Plaintiffs contended the genuine dispute doctrine did not excuse the insurer’s claim denial because it formed its view of coverage at the outset of the claims process for conducting an investigation, that is not relevant, even if it were true. It is undisputed that the building did not fall to the ground and nothing about the investigation would or could have impacted a coverage decision based on defendant’s interpretation of the policy. While defendant’s policy interpretation ultimately proved to be incorrect, given the ambiguity of the contract and the manner in which California law requires such ambiguity to be construed, accordingly, the court held that defendant insurer was entitled to summary judgment in its favor as to the plaintiffs’ bad faith claim.