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Hoban v. Nova Casualty Company (E.D. Cal. 2018) 2018 WL 3954737, Case No. 1:17-cv-00286-DAD-SKO

Wednesday, September 19, 2018

UNDERLYING FACTS

Plaintiffs owned and operated a bowling center in Madera, California. On June 3, 2016, two roof trusses failed causing the ceiling, overhead monitors and a disco ball to drop six to ten inches. The failure of the trusses also caused ceiling tiles and insulation to fall to the tabletops below, as well as damage to at least one exterior wall. The county ordered the business closed to protect public safety. Plaintiffs hired general contractor Tom Powers to shore up the roof to prevent a complete collapse and temporary braces were installed. Interim repairs were conducted between June and July to shore up the roof. Once this was completed, the business was reopened.

Plaintiffs had commercial insurance coverage with Nova providing coverage for all physical loss, unless excluded, and which included additional coverage specifically covering collapse. The policy's collapse coverage applied only to an abrupt collapse defined in part as "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 coverage specifically excluded "a building or any part of a building that is in danger of falling down or caving in," "a part of a building that is standing, even if it has separated from another part of the building," or "a building that is standing or any part of a building that is standing, even if it shows evidence of cracking, bulging, sagging, bending, leaning, settling, shrinkage or expansion."

Plaintiffs submitted a claim to Nova and Nova hired a structural engineer to investigate the cause of the damage. The engineer concluded that Truss Line 2 failed as a result of "a hidden anomaly present in the natural occurring wood member material and the degradation of the wood fibers due to the daily and seasonal cycling of temperature and humidity." He further concluded that Truss Line 5 failed as a result of "the combination of a defective method of construction and the degradation of the wood fibers due to the daily and seasonal cycling of temperature and humidity." Finally, the engineer concluded that the efforts to shore up the trusses prevented further failures in the trusses which could have led to a complete collapse. Nova continued to investigate the claim over the next few months and, after retaining an attorney to provide coverage advice, denied the claim on September 14, 2016 citing the exclusions for "wear and tear," "deterioration," "hidden or latent defect," "any quality in property that causes it to damage or destroy itself," "settling, cracking, shrinking or expansion," "seepage or leakage of water," and "weather conditions."   Nova further denied the claim on the ground that the ceiling and roof had not "collapsed" since the building was still standing and, therefore, the "collapse" coverage did not apply.

Plaintiffs filed suit in federal district court alleging breach of contract and bad faith and the parties filed cross-motions for summary judgment on the breach of contract claim. Nova also sought summary judgment on the bad faith claim.

 

THE DISTRICT COURT'S RULING

The court began its analysis by pointing out that there is a split of authority in California over the scope of collapse coverage when the term is undefined. And although insurers have reacted by defining the term and attempting to make the coverage clearer, this has met with limited success as courts continue to grapple with its meaning. "'One line of case law holds that "collapse" requires a complete falling down or flattening to rubble before the loss becomes insured. The other line of cases (which has been termed the "modern" and "majority" view) holds that the building need not entirely or even partially fall down in order for damage to rise to the level of a collapse. Rather, the property is deemed to have collapsed if the damage materially impairs the basic structure or substantial integrity of the building.'" (Citations.)   Under California law, the scope of collapse coverage varies depending on the specific language used in the contract. (See Doheny West Homeowners' Ass'n v. Am. Guar. & Liab. Ins. Co. (1997) 60 Cal. App. 4th 400 [language in policy was ambiguous and therefore covered both actual and imminent collapse]; Rosen v. State Farm Gen. Ins. Co. (2003) 30 Cal. 4th 1070 [distinguishing Doheny and finding that if language unambiguously covers only actual collapse, imminent collapse is not sufficient]; Jordan v. Allstate Ins. Co. (2004) 116 Cal. App. 4th 1206 [where policy referred to "entire collapse," imminent collapse was not sufficient to trigger coverage.)

The court then looked to the policy language at issue, which differed from that used in the foregoing cases. In so doing, the court concluded that the policy language defining an "abrupt collapse" was ambiguous and capable of more than one reasonable interpretation. As noted above, this term is defined in the policy as "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 court observed that "one reasonable meaning of 'caving in' is defendant's understanding that the building has completely collapsed to the ground." Although the policy did attempt to differentiate between an abrupt collapse and a building that is standing, it did not "unambiguously require that the building or part of the building must collapse completely to the ground."   The court noted that a building can "cave in" to the extent that it cannot be occupied for its intended purpose if "its roof or ceiling fall an appreciable distance, even if the building as a whole has not completely collapsed to the ground." The court concluded that "the contract does not use the term 'complete collapse,' which would more readily refer to the degree of collapse. The fact that coverage applies to the 'abrupt' collapse of either 'a building' or 'any part of a building' strongly suggests the policy was intended to cover a partial collapse of parts of the building, so long as it occurred abruptly, not only total or complete collapse. Moreover, specifying that the collapse must render the building or part of the building so that it 'cannot be occupied for its intended purpose' would be unnecessary and redundant if the policy required the building or part of the building to have collapsed to the ground." Since the policy was capable of two reasonable interpretations, the court concluded it must be interpreted in favor of the insured and, therefore, it was not necessary that the building fall to the ground for coverage to apply. Because the undisputed facts showed that the entire ceiling of the building fell six to ten inches and that ceiling tiles and insulation fell to the tabletops below, it was undisputed that "part of a building" had "fall[en] down." Furthermore, it was undisputed that the business was closed by the County for public safety reasons and was therefore incapable of being occupied for its intended purpose.

The court also addressed the policy language to the effect that coverage did not apply to parts of the building that are standing "even if it shows evidence of cracking, bulging, sagging, bending, leaning, settling, shrinkage or expansion," finding that this language could reasonably be read as excluding coverage for regular maintenance and not as requiring complete collapse. In addition, the court noted that "to the extent the policy excludes coverage for buildings that are 'standing,' the failure to define that term combined with the definition of 'abrupt collapse' creates an ambiguity that must be resolved against defendant here." The court granted the plaintiffs' motion and denied the defendant's motion for summary judgment on the breach of contract claim.

Finally, the court addressed the insurer's motion on the bad faith cause of action. The court determined that the insurer's decision to withhold payment was based on a genuine dispute over coverage and thus there was no bad faith. The court also addressed the plaintiffs' contention that the insurer formed its view at the outset of the claims process prior to conducting an investigation and that it therefore acted in bad faith. The court disagreed, noting that , even if true, it was irrelevant. "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." Therefore, the court granted the insurer's motion for summary judgment on the bad faith cause of action.

 

EFFECTS OF THE  COURT'S RULING

In the present case, although the insurer may have intended to cover only a building or part of a building that has suffered a complete collapse- namely a falling down to the ground- the court found that the policy did not make this intent clear.  The insurer agreed to cover not only an abrupt falling down but also a "caving in" of a building or any part of a building.  The court found this could reasonably apply to the present facts where the ceiling had fallen an appreciable distance.  Although it is not too difficult to understand the court's reasoning on this issue, the same cannot be said of its apparent disregard of the policy exclusionary language which clearly indicated that coverage would not apply to buildings or parts of buildings that are standing.  This disregard was apparently based on the ambiguity of the covering language and the failure to define "standing."  The mere fact that covering language may be ambiguous should not nullify the applicability of an otherwise clear exclusion.  Furthermore, the court fails to explain what it found to be ambiguous about the undefined term "standing."  Due to this questionable reasoning, it may be that a California court faced with a similar issue would rule differently.  However, insurers who wish their collapse coverage to cover only those situations where a building has collapsed completely to the ground should use policy language which makes this clear.                      

 

This opinion is not final. It may be withdrawn from publication, modified upon rehearing, or review may be granted by the California Supreme Court. These events would render the opinion unavailable for use as legal authority.

This publication is intended for informational purposes only and is not intended as legal advice or as a substitute for legal consultation in a particular case or circumstance. Transmission of this information is not intended to create, and receipt does not create, an attorney-client relationship.

Last Updated Sunday, October 21, 2018 - 01:49 AM.