"Risk" Language Provides Coverage Before Actual Collapse Occurs
September, 2005
In a case of first impression, the Pennsylvania Supreme Court interprets the common yet controversial property insurance policy provision: “damage caused by or resulting from risks of direct physical loss involving collapse of a building or any part of a building.” 401 Fourth Street, Inc. v. Investors Ins. Group, 879 A.2d 166 (Pa. 2005).
Facts
Tenants in plaintiff’s building noticed that a parapet wall on the building was bowed and leaning inward. Experts agreed that the wall was in danger of falling but disagreed as to the reason. Plaintiff’s expert concluded the internal bonds holding the parapet wall had given way, and that a large sudden movement had occurred. Investors’ expert concluded the interior steel had corroded, and as a result, expanded, causing the wall to move. Plaintiff filed a claim under its property insurance policy, specifically an endorsement covering collapse. The endorsement stated:
D. ADDITIONAL COVERAGE - COLLAPSE
We will pay for loss or damage caused by or resulting from risks of direct physical loss involving collapse of a building or any part of a building caused only by one or more of the following…
***
2. Hidden decay
***
Collapse does not include settling, cracking, shrinkage, bulging or expansion.
The parties filed cross-motions for summary judgment. Plaintiff argued the policy language “risks of direct physical loss involving collapse,” should cover its building even when the wall was only in danger of collapse. It argued that the term “collapse,” as well as the phrase “risks of direct physical loss involving collapse,” was ambiguous, and a growing majority of courts have defined the term “collapse” as “any serious impairment of structural integrity.” Therefore, the policy language reasonably encompasses not only situations where an actual collapse has occurred, but also those where a wall is in imminent danger of falling. Plaintiff also asserted that unlike policies at issue in prior case law, the instant policy language including the terms risks of direct physical loss involving collapse provides broader coverage.
Investors, on the other hand, argued that under well-established Pennsylvania case law, the term “collapse” in an insurance policy has been interpreted to require the actual falling down of the wall. Plaintiff’s wall did not collapse, and in the absence of such collapse, there is no coverage. Investors also argued that use of the terms “risks” and “involving” does not expand coverage to buildings that are in danger of collapse. Further, Investors maintained that the policy specifically excludes coverage for “bulging” and on that basis, plaintiff is not entitled to relief.
The trial court ruled for Investors, holding that the term “collapse” contained in the provision providing coverage for “risks of direct physical loss involving collapse,” meant the actual physical falling down of the structure. The court reasoned that prior Pennsylvania case law supported its decision and plaintiff’s parapet wall clearly had not fallen down.
The appellate court reversed. It criticized the trial court’s focus on the term “collapse,” choosing instead to emphasize the language “risks of direct physical loss involving collapse.” The court reasoned that the use of the terms “risks” and “involving” broadened the policy’s coverage to include something less than a structure completely falling to the ground.
Analysis
The Pennsylvania Supreme Court affirmed the appellate court finding that the policy language provided coverage extending beyond the situation in which an insured’s building falls to the ground. Instead of focusing on “collapse,” the Court concentrated on the meaning of the entire phrase “risks of direct physical loss involving collapse.” Finding decisions from other jurisdictions instructive, and recognizing a fast emerging consensus regarding interpretation of this type of policy language, the Court found the policy language to be ambiguous and, therefore, susceptible to different interpretations. The Court reasoned that, by its terms, the policy provision contemplates broader coverage than policy language simply using the term “collapse,” particularly when compared to policy language found in other insurance contracts. The policy language covers not only loss for a collapse, but also the risk of loss involving collapse.
The Court further reasoned that to interpret the policy language as limited to only the falling of a building, even under existing case law, would give too narrow an interpretation to the broad language drafted by the insurer. Careful to avoid what might look like a maintenance contract as opposed to a contract of insurance, the Court noted that its interpretation should not be extended to those instances where the property merely suffers substantial impairment to its structural integrity. In other words, the covered property must be threatened with collapse.
The Court also noted that even though Investors’ policy excluded incidences of “bulging” from the definition of “collapse,” that did not warrant a decision in their favor. The Court reasoned that while insurance contracts may state that a collapse does not include settling, cracking, shrinking, bulging, or expansion, it is hard to imagine a collapse that would not include some of these characteristics. Therefore, the term “collapse” can reasonably be interpreted as not including minor settling, cracking, or bulging, but includes settling, cracking, or bulging that results in the collapse or immediate threatened collapse of the building. The Court opined that coverage under the policy language at issue would be illusory and contrary to the intent of the parties if bulging was part of an imminent collapse but coverage was then excluded.
The opinion contains a persuasive dissent by Justice Saylor. While agreeing with the majority that the term “collapse” should have a broader interpretation than previously given by the courts, the dissent argues that existing policies should not be subject to the majority’s ruling. Insurers relied on the meaning of “collapse” as interpreted by existing case law when drafting their policies and it is unfair to make them provide coverage where they did not expect it to extend.
Justice Saylor also differed with the majority’s approach to interpreting the controversial policy phrase. Risks of direct physical loss rightly extend to coverage for things like fire, lightning, wind, hail and smoke, but should not protect against losses occasioned in mere anticipation of future events. According to his dissent, the phrase “risk of collapse” should not refer to the potential for collapse in the future but is a phrase that is used generically to include the circumstance of “collapse” within the “risks” or perils insured against.
Learning Point:
As 401 Fourth Street illustrates, when courts interpret the phrase “risks of physical loss involving collapse,” rather than the term “collapse,” coverage is provided for damage caused by imminent collapse of a building and not limited to damages for actual collapse of the building. This is an issue that is sure to generate much litigation in the future. Property lawyers as well as insurance carriers need to be aware of the unique ramifications of this decision and others like it. We will continue to watch this issue and provide our readers with updates as they occur. •
Back to CM Report of Recent Decisions (2005v3) 2005 Volume 3 Table of Contents
