Washington Supreme Court Defines Collapse in a Property Policy

Until recently, Washington law on what constitutes “collapse” in a first-party property insurance policy has been unsettled. But that issue has now been resolved with the Washington Supreme Court’s answer to the Ninth Circuit Court of Appeals certified question on the definition of “collapse” as “substantial impairment of structural integrity.”

The Queen Anne Park Condominium in Seattle, Washington, was originally constructed in the 1980’s. In 2009, the Queen Anne Park Homeowners Association (“HOA”) discovered that the siding on the buildings was leaking, which caused hidden decay. The building was insured by State Farm Fire and Casualty Company (“State Farm”) from October 18, 1992 to October 18, 1998 (“Policy”). The Policy included a collapse coverage form, which provided coverage for “any accidental direct physical loss to covered property involving collapse of a building or any part of a building caused only by one or more of the following: …(2) hidden decay.” The collapse coverage form further stated that “[c]ollapse does not include settling, cracking, shrinking, bulging or expansion.” The term “collapse” was not defined in the State Farm Policy.

5-25The Washington Supreme Court held that the undefined term “collapse” is ambiguous because it is susceptible to more than one reasonable interpretation. In support of its holding, the Court noted that in Sprague v. Safeco Ins. Co. of America, 174 Wn.2d 524, 276 P.3d 1270 (2012), different definitions of “collapse” were proposed by the dissent (“to break down completely: fall apart in confused disorganization: crumble into insignificance or nothingness…fall into a jumbled or flattened mass”) and by the concurrence (“a breakdown of vital energy, strength, or stamina”). The Court also noted that courts throughout the country have adopted different but reasonable definitions of “collapse” in insurance policies, i.e. Olmstead v. Lumbermens Mut. Ins. Co., 22 Ohio St. 2d 212,259 N.E.2d 123, 126 (1970) (“collapse” defined as “a falling down, falling together, or caving into an unorganized mass”); Am. Concept Ins. Co. v. Jones, 935 F. Supp. 1220, 1227 (D. Utah 1996) (collapse” defined as substantial impairment of structural integrity); Buczek v. Cont’l Cas. Ins. Co., 378 F.3d 284, 290 (3d Cir. 2004) (“collapse” defined as substantial impairment of structural integrity that “’connotes imminent collapse threatening the preservation of the building as a structure or…health and safety”). In particular, the Court observed that in at least one other case, State Farm had agreed with the insured that the term “collapse” meant “substantial impairment of structural integrity.” Mercer Place Condominium Assoc. v. State Farm Fire & Cas. Co., 104 Wn. App. 597, 17 P.3d 626 (2000).

Because the term “collapse” was ambiguous, the Court adopted a definition that is reasonable and most favorable to the insured, i.e. “substantial impairment of structural integrity.” The Court explained that the “structural integrity” of a building means a building’s ability to remain upright and that “substantial impairment” means a severe impairment. The Court stated that, “[t]aken together, ‘substantial impairment’ of ‘structural integrity’ means an impairment so severe as to materially impair a building’s ability to remain upright. Considering the Policy as a whole, we conclude that ‘substantial impairment of structural integrity’ means the substantial impairment of the structural integrity of all or part of a building that renders all or part of the building unfit for its function or unsafe and, in this case, means more than mere settling, cracking, shrinkage, bulging, or expansion.”

Because the newer collapse coverage forms usually define the term “collapse” as an actual falling down or caving in of a building or any part of a building, the Washington Supreme Court’s clarification on the definition of “collapse” will not be an issue. However, when the term “collapse” is undefined, the parties will likely engage in an expensive and prolonged battle of the experts as to what constitutes a building or part of a building to be “unfit for its function or unsafe,” and when such condition occurred.


Image courtesy of Flickr by Paul Sableman

Getting Schooled by Sandy and Irene: What Insurance Lessons Can We Learn?

It is a simple premise, but many insurance coverage disputes, perhaps even a majority of them, could be completely avoided if policyholders would take the time to read their insurance policies.  With winter storms upon us, now might be a good time.

No matter how complex the legal issues or controlling authorities are in any coverage case, the analysis almost always starts and ends with the express language of the insurance policy at issue.   As the Connecticut District Court often tells us, insurance policies are interpreted “in accordance with the parties’ intent, as derived from the plain and ordinary meaning of the policy’s terms.”  It nonetheless appears that many of the coverage disputes popping up on Connecticut’s federal docket arise from a failure to follow the most basic commandment applicable to every insurance policy, or any other contract for that matter:  Thou shalt read the policy, and read it in its entirety.

IP BLOG_hurricane sandyTwo cases recently decided by the Connecticut District Court in the wake of Hurricane Irene and Super Storm Sandy shine a spotlight on the importance of reading the entire insurance policy and reviewing your coverage with your agent or broker.  These cases show that understanding the express language of the policy is not only crucial for the policyholder to anticipate which claims will be covered and which will not in order to ensure appropriate coverage, but also so that the policyholder knows exactly what must be done in order to properly present a claim for coverage after the damage has been done.  In each case, the District Court granted summary judgment in the insurer’s favor based on the plain language of the disputed policy.

Azoulay v. Allstate Insurance Company, No. 3:12-cv-1693(JBA), 2014 U.S. Dist. LEXIS 159177 (D. Conn. Nov. 12, 2014)(Arterton, J.) arose from a coverage dispute between the plaintiff, Moshe Azoulay, and his insurer, Allstate, regarding his claim for flood damage to his property caused by Hurricane Irene.  Mr. Azoulay’s policy was a Standard Flood Insurance Policy, which was promulgated by the Federal Emergency Management Agency and which Allstate was not permitted to alter in any way.  Every Standard Flood Insurance Policy requires an insured seeking compensation for a loss to send the insurer a “proof of loss,” which is the insured’s statement of the amount that he is claiming under the policy, within 60 days of the loss.  This proof of loss must be “signed and sworn to by the insured.”  Mr. Azoulay’s property was damaged by Hurricane Irene in August of 2011, and within two months he provided Allstate’s assigned adjuster with receipts for cleanup costs totaling $5,000 and an itemized list of damages to the property totaling an additional $35,983.  Allstate’s adjuster provided Mr. Azoulay with a Proof of Loss concluding that the total cost of repairing his property was $2,044.61, leaving him with a covered claim of $44.61 after factoring out his $2,000 deductible.  Mr. Azoulay signed, notarized, and faxed Allstate this Proof of Loss, adding the notation “undisputed damages only.”  He also sent Allstate copies of receipts, a list of itemized damages, and pictures of the damaged property, none of which were signed or notarized.  Mr. Azoulay then filed suit after Allstate failed to respond to him regarding his claims in excess of $44.61.

Allstate moved for summary judgment, arguing that Mr. Azoulay did not comply with his flood insurance policy’s proof of loss requirement with respect to his additional claims because the only signed and sworn proof of loss that he submitted was for $44.61. The District Court accepted Allstate’s argument, holding that Mr. Azoulay’s attachment of itemized damages did not suffice as a supplemental proof of loss, because this document was neither signed nor notarized as required by the Standard Flood Insurance Policy.  The court relied on the Second Circuit’s legal standard that “[b]ecause the federal government is liable for claims brought under [Standard Flood Insurance Policies] issued by private insurers, the Constitution mandates strict compliance with the [Standard Flood Insurance Policy],” and granted summary judgment in Allstate’s favor.  The world will never know how much Mr. Azoulay might have recovered if he had only signed and notarized his itemized list of additional damages.

Despite the heightened standard applicable to Standard Flood Insurance Policies, the lesson is broadly applicable.  The District of Connecticut’s holding in Great Lakes International Trading, Inc. v. Travelers Property Casualty Company of America is literally the case in point.  No. 3:13-cv-01522(JAM), 2014 U.S. Dist. LEXIS 165378 (D. Conn. Nov. 26, 2014) (Meyer, J.).

The Great Lakes case arose from the plaintiff’s disputed claim for over $1.5 million in damages to the insured’s inventory of seeds, dried fruit, and edible nuts caused by Super Storm Sandy.  The plaintiff, a food importer, had several insurance policies with Travelers, including a Marine Open Cargo Policy that contained a Warehouse Coverage endorsement providing up to $5 million in coverage for damage to goods stored in the Plaintiff’s warehouse.  Unfortunately for the insured, however, the Warehouse Coverage endorsement provided that “the peril of Flood is excluded” from coverage.  After Sandy hit the plaintiff’s New Jersey warehouse, Travelers paid nearly $900,000 for damages caused by rainwater entering the warehouse through openings in the roof, but Travelers refused to pay an additional $650,000 claimed by the plaintiff, stating that these damages were attributable to rising flood-waters from a nearby river, and were therefore excluded from coverage.  The plaintiff filed suit, and Travelers moved for summary judgment, arguing that the plain language of the policy precluded coverage.

While claimants often attack policy exclusions as being ambiguous, the language of the exclusion at issue, which stated, “It is further understood and agreed that the peril of Flood is excluded for the following location,” then listed the name and address of the plaintiff’s New Jersey warehouse, was too clear for the plaintiff to even attempt to argue that any ambiguity existed.  Facing Travelers’ motion for summary judgment, the plaintiff mustered the best argument at its disposal; that the flood exclusion did not apply because it was tacked on at the very end of the Warehouse Coverage Endorsement, and did not have its own sub-heading.  The exclusion appeared as the final paragraph under the sub-heading “Earth Movement Sublimit & Deductible,” following several paragraphs referring to coverage sub-limits and deductibles for losses stemming from “earth movements.”  The plaintiff argued that the placement of the flood exclusion indicated that it only applied if the flood was caused by an earthquake or other earth-movement.

While noting that “[a]n insurance company should know better” than to place the flood exclusion in the policy so “awkwardly”, the court nonetheless enforced the exclusion.  First, the court observed that the wording of the exclusion itself was clear.  Next, the court held that the opening words of the exclusion, stating “It is further understood . . .,” made it sufficiently clear that the flood exclusion stood apart from the remainder of the preceding paragraph regarding earth-movement related sub-limits and deductibles.  Lastly, the court succinctly rejected the argument that the flood itself arose from a covered cause, a storm, holding that damages caused by the flood nevertheless fell within the scope of the flood exclusion.  The court granted summary judgment in the insurer’s favor, and Great Lakes International Trading was left holding a bag of soggy nuts.

Neither Mr. Azoulay nor Great Lakes International Trading appear to have been lazy, unsophisticated, or dilatory – in fact, both demonstrated some acumen when it came to dealing with insurance.  Mr. Azoulay actually took the time to save and organize all of his receipts, to take photographs documenting his property damage, and to create an itemized list of all of the damage that Hurricane Irene caused.  These tasks were all probably more time consuming than simply reading through his entire insurance policy, word for word.  If Mr. Azoulay had only signed and notarized his own itemized list of damages at the same time that he signed and notarized Allstate’s proof of loss, he would likely have been able to recover additional insurance proceeds and avoid litigation entirely.

Great Lakes International Trading, for its part, appears to have been a sophisticated consumer of insurance.  The court observed that Great Lakes had more than one policy with Travelers as well as the fact that Great Lakes had procured a separate Warehouse Coverage endorsement to insure the goods stored in its facilities that would not have been covered by its Marine Open Cargo Policy.  It stands to reason that a business like Great Lakes may have worked with a broker to procure its insurance and that it should have been made aware of the flood exclusion in the first instance.  Nonetheless, if Great Lakes had simply read its own insurance policy, it would have seen the exclusionary language and presumably procured additional insurance to guard against the risk of a flood.  Great Lakes learned an important lesson to be sure, but unfortunately that lesson came at the cost of over a half million dollars in damaged fruit.  Yet, we can all learn from it now.

The words in an insurance policy have a legally binding effect, and they are therefore chosen very carefully.  It behooves policy-holders to read every single one of those words, no matter how tedious, lest they be caught unaware at the worst possible time like Mr. Azoulay or Great Lakes International Trading.  So the next time a nor’easter arrives to give us a snow day, we should all turn off the Netflix for a minute and take the time to read through our insurance policies from cover to cover.  Maybe after just one more episode . . . .


This article was originally published in the Connecticut Law Tribune and can be accessed here.

Image courtesy of Flickr by NOAA’s National Ocean Service

Washington’s Insurance Fair Conduct Act Only Applies to First-Party Claims

Ever since the Washington Insurance Fair Conduct Act (“IFCA”) took effect on December 6, 2007, insureds have asserted a claim for IFCA violation in lawsuits against an insurance company.  While IFCA specifies that “[a]ny first party claimant to a policy of insurance who is unreasonably denied a claim for coverage or payment of benefits by an insurer may bring an action,” insureds under both first-party policies and third-party liability policies have asserted IFCA claims in light of Washington courts’ very pro-policyholder attitude.  An IFCA claim is very attractive to the insureds because if a court finds that an insurer acted unreasonably in denying a claim for coverage or payment of benefits, an insured is entitled to actual damages (not limited to the benefits that were unreasonably denied), treble of those damages, and attorneys’ fees and costs.

Earlier this year, however, Judge Marsha Pechman dismissed plaintiffs’ IFCA claim against Continental Casualty Company (Continental), ruling that IFCA does not apply to third-party liability claims.  Cox v. Cont’l Cas. Co., 2014 U.S. Dist. LEXIS 68081 (W.D. Wash. May 15, 2014). Judge Pechman explained that only a “first party claimant to a policy of insurance” has a right of action under IFCA.

Cox arises out of a malpractice action against retired dentist, Dr. Henri Duyzend.  In the malpractice action, a group of Dr. Duyzend’s former patients secured a judgment totaling $35,212,000 against Dr. Duyzend for their malpractice claims.  Thereafter, on an assignment of claims from Dr. Duyzend, the dental patients sued Continental, alleging in part that Continental acted in bad faith and violated the IFCA by not pursing a global settlement with them and risking an excess judgment against Dr. Duyzend.  Continental had issued a professional liability policy to Dr. Duyzend.

With regard to the plaintiffs’ IFCA claim, Judge Pechman explained that “[a]n IFCA claim arises when ‘any first party claimant’ to a policy of insurance … is unreasonably denied a claim for coverage or payment of benefits by an insurer.”  Judge Pechman noted that a third-party insurance policy “indemnif[ies] an insured for covered claims which others [third-party claimants] file against him.”  The professional liability policy at issue in Cox was a third-party liability policy, not a first-party insurance policy.  As a result, Dr. Duyzend was never a first-party claimant under the IFCA and could not assign an IFCA claim to the plaintiffs.  Therefore, Judge Pechman dismissed the plaintiffs’ IFCA claim.

In one subsequent case, Judge Pechman held consistently with her decision in Cox.  Judge Pechman denied a plaintiff’s motion to amend the complaint to assert an IFCA violation against an insurer under a third-party liability policy, holding that such claims are not permitted under the rule.  Judge Pechman refused to certify to the Washington Supreme Court the question of whether an insured under a third-party liability policy may have an IFCA claim.  In so holding, the court affirmed that under Washington law, coverage which “indemnif[ies] an insured for covered claims which others [third-party claimants] file against him is third-party coverage.  As discussed in Cox, the IFCA defines ‘first party claimant’ in a narrow way that applies only to first-party insurance.”