California Appeals Court Finds Ambiguity In Homeowner’s Policy, And Interprets “Entire Collapse” Provision To Require Actual Collapse
March, 2004
The California Court of Appeal - Second District has held that an ambiguity existed in a homeowner’s policy with respect to the policy’s “wet or dry rot” exclusion, and that the phrase “entire collapse,” which was found in an additional coverage section of the policy, required an actual collapse to occur for the policy’s additional coverage to be provided.
Facts
In Jordan v. Allstate Ins. Co., 11 Cal. Rptr. 32d 169, the insured, Mary Ann Jordan (“Jordan”), purchased a Deluxe Plus Homeowner’s policy from Allstate Insurance Company (“Allstate”) for coverage on her 70-year-old Santa Monica home. The policy provided all risk insurance coverage, subject to certain exclusions. Jordan filed a claim with Allstate after she was “advised that there was evidence of damage to her home that had been caused by a water conducting fungus.” Jordan also learned that portions of her living room floor were in imminent danger of collapse. Allstate denied Jordan’s claim, primarily on the ground that the damage to her home was caused by Poria fungus, and that Poria fungus is considered to be wet or dry rot under the policy’s exclusion for any loss consisting of or caused by “… rust or other corrosion, mold, wet or dry rot.” Jordan filed suit, and on the parties’ cross-motions for summary judgment, the trial court granted summary judgment to Allstate.
Analysis
The appellate court reversed and remanded the case for trial. In so doing, the court focused on the interplay of policy provisions which excluded loss consisting of or caused by “rust or other corrosion, mold, wet or dry rot,” “loss to … property consisting of or caused by collapse” and the policy’s additional coverage section which provided coverage for “the entire collapse of a covered building structure[,] the entire collapse of a part of a covered building structure[,] and direct physical loss to covered property caused by” the entire collapse of a covered building structure or a part of a covered building structure.
The court first held that the policy’s exclusion for wet or dry rot applies to damage caused by fungus, finding that “a layperson would describe the decay caused by the fungus as ‘dry rot.’” The court looked to Webster’s Third New International Dictionary (1966) as support for its conclusion, noting that it defines “dry rot” as “a decay of seasoned timber caused by certain fungi (as the house fungi and some polyspores) that consume the cellulose of wood leaving a mere soft skeleton that is readily reduced to powder.”
Applying general principles of contract interpretation, the Jordan court then held that an ambiguity existed between the policy’s exclusion for “wet or dry rot” and the policy’s additional coverage provision for collapse. The court concluded that an ambiguity was present because these policy provisions could be interpreted in two different ways. “First, we could conclude that a collapse due to ‘hidden decay’ would be covered, but not if such decay was caused by ‘wet or dry rot’; or, second, we could conclude that coverage for a collapse due to ‘hidden decay’ was provided, but non-collapse damage caused by ‘wet or dry rot’ was excluded. Each of these constructions of the policy language is reasonable.” Id. at 1219.
When the ‘dry rot’ exclusion is read in the context of the entire policy, particularly the exclusion for collapse and the ‘additional coverage’ exception thereto, an insured could reasonably conclude that while the ‘dry rot’ exclusion will generally preclude coverage for damage caused by a fungus, the exception to the collapse exclusion will counter that and provide coverage for a collapse caused by ‘hidden decay.’ Since dry rot is a form of decay … coverage would be reasonably expected. Put another way, an insured’s objectively reasonable expectation of coverage could arise from a reading of the entire policy in context because the ‘collapse’ exception for ‘decay’ will justify coverage for a collapse caused by ‘dry rot,’ even if non-collapse damaged caused by dry rot is excluded. That being so, we must resolve ambiguity by looking to the objectively reasonable expectations of the insured and construing the policy language consistent therewith against the insurer. Id. at 1220. (Emphasis not added.)
After holding the policy to be ambiguous on these terms, the court finally held that “[w]hether Jordan can demonstrate the existence of coverage under the provisions of the collapse exception involves factual questions that remain to be resolved.” The court interpreted the policy’s phrase “entire collapse” to require “an actual, not an imminent collapse.” The court remanded the case so that a jury could determine whether Jordan’s home had actually collapsed, or whether it was simply in a state of imminent collapse. “While the ‘additional coverage’ collapse exception may provide a basis for coverage under Allstate’s policy in spite of the ‘wet or dry rot’ exclusion, unresolved questions of fact remain as to whether Jordan is actually entitled to such coverage.”
Learning Point:
This case demonstrates that courts typically, pursuant to contract interpretation principles, read an insurance policy as a whole, further illustrating that all insurance policy exclusions and coverage provisions must be considered together during the policy underwriting phase. ¨
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