Is the Leaning Tower of Pisa a Covered Collapse Loss?
September, 2004
The Ninth Circuit found coverage for “collapse” in a property policy for a building in a state of imminent, but not actual, collapse. Assurance Co. v. Wall and Associates, L.L.C., 379 F.3d 557 (9th Cir. 2004). As a result, it reversed the federal court for the Western District of Washington which had awarded summary judgment to the insurer on the basis no collapse occurred.
Facts
Wall owned two buildings called Percival Plaza. The structures consisted of steel columns and steel beams with open-web joists. The exterior siding, attached to gypsum sheathing, was a polystyrene foam wall system called External Insulation Finishing System (EIFS), a relatively new construction method at the time Percival Plaza was built.
Soon after construction was complete in 1990, the insured experienced leaking water. Re-caulking of windows and applying elastomeric paint produced a reprieve through most of the 1990’s, only to be followed by additional leaks in 1999. In that year, the insured hired an architect and construction repair specialist. Their tests revealed that the buildings had decayed and deteriorated as a result of the water intrusion. They found that the gypsum sheathing had turned to mush, and the EIFS exterior siding was in danger of completely falling off the buildings, creating a serious risk to passersby. There was no way to tell when the EIFS would fall. However, with the slightest touch, brick facades fell off the buildings.
After repairs, the insured submitted a proof of loss for over a half million dollars. The proof sought coverage for collapse and described the cause as “deterioration of gypsum wall-board forming substrate of exterior wall system, creating high risk of failure of structural support for brick facing.” The insurer denied the claim on the basis that there had been no covered collapse.
The policy provided coverage for “[r]isks of direct physical loss or damage . . . .” The policy excluded collapse, but the exclusion continued:
(1) If collapse results in a Covered Cause of Loss at the “described premises,” we will pay for the loss or damage caused by that Covered Cause of Loss.
(2) 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 by only one or more of the following:
(a) The “specified causes of loss . . . ”;
(b) Hidden decay . . . .
The policy defined “Specified Causes of Loss” to include water damage, “meaning accidental discharge or leakage of water . . . . as the direct result of the breaking or cracking of any part of the system or appliance containing water . . . .” The policy also specified that “collapse does not include settling, cracking, shrinkage, bulging or expansion.”
Analysis
In construing Washington law, the court interpreted Panorama Village v. Allstate Ins. Co., 26 P.3d 910 (Wash. 2001), as implicitly holding that the risk of collapse, not merely an actual collapse, was covered by a similar policy. The court also relied on language in Mercer Place Condo v. State Farm, 17 P.3d 626 (Wash. App. 2001), saying that the majority of jurisdictions have assigned the more liberal standard, “substantial impairment of structural integrity,” to the use of “collapse” in insurance policies, as opposed to the minority view, which requires that the structure actually fall down. The court pointed to similar conclusions in other states. Whispering Creek Condo. v. Alaska Nat’l. Ins. Co., 774 P.2d 176 (Alaska 1989)(building had not fallen to ground, but roof in immediate danger of complete collapse); Doheny West Homeowners’ Assoc. v. American Guar. and Liab. Ins. Co., 70 Cal. Rptr. 2d 260 (1997)(pool to be emptied of water because earthquake could cause complete collapse of pool).
In Doheny West, the court said any other interpretation would encourage neglect of repair, allowing buildings to fall, and would be contrary to both the expectations of the insured, and the best interests of the public and the insurer. The Doheny West court found that the clause, “risks of direct physical loss involving collapse of a building,” does not limit itself to “collapse of a building” but covers “risk of loss,” that is, the threat of loss. With the phrases “risk of loss,” and “involving collapse,” the policy broadened coverage beyond actual collapse, according to Doheny West. The court distinguished the outcome in Rosen v. State Farm, 135 Cal. Rptr. 361, 70 P.3d 351 (2003), where coverage was restricted to actual collapse, since that policy specified “We insure only for direct physical loss to covered property involving a sudden, entire collapse of a building or any part of a building,” and defined “collapse” as “actually falling down or falling into pieces.” Likewise, the Ninth Circuit found the Assurance Company policy included language which qualified the term “collapse” by use of the terms “risks of direct physical loss” and “involving.” It approved the holding and opposite result in Rosen since that policy defined collapse as “actually falling down or falling into pieces.”
Learning Point:
The phrase “risk of direct physical loss” has been construed as providing coverage for the mere threat of loss. Other than its reference to endangerment of the public, the court gave little attention to what criteria might qualify a collapse hazard as “imminent.” Instead, it decided “collapse” need not be “actual.” If underwriters and insurers do not intend to cover imminent, as opposed to actual, collapse, they must define the term “collapse” as “actually falling down or falling into pieces,” and consider avoiding use of the phrase “risk of . . . loss” in their coverage clauses. Otherwise, if the public and the marketplace expect and demand coverage for loss due to a building in a state of imminent collapse - a view to which the Ninth Circuit apparently subscribes - then they will have it, but at a market price commensurate with the risk. Finally, the answer to the headline inquiry will depend on the language of the policy, i.e., whether it tracks the language of the policy in Rosen or that in Assurance Company, Panorama Village, Whispering Creek and Doheny West.
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