Betts Patterson Mines

“Collapse” Coverage Under Long-Expired Property Policies Finally Limited Under Recent Federal Decisions

Earlier this year, two federal courts reached the common-sense conclusion that upright and occupied buildings could not have been in a state of collapse during the term of a first-party insurance policy that expired years earlier. These rulings put a damper on the growing trend of condominium associations seeking recovery under dated first-party property policies.

Property policies often cover repairs to a building or part of a building that is in a state of “collapse.” In the last several years, insurers have incorporated narrow definitions of that term into their policies, such as “an abrupt falling down or caving in of a building.” But some older policies leave “collapse” undefined. Courts have filled this definitional gap in three ways. Some interpret collapse to mean actual falling down, others conclude that collapse means an imminent threat to a building’s structure or to health and safety, and yet others define collapse to mean the “substantial impairment of structural integrity.”

In 2015, the Washington Supreme Court largely adopted the third and most expansive definition. Queen Anne Park Homeowners Ass’n v. State Farm Fire & Cas. Co., 183 Wn. 2d 485, 352 P.3d 790 (2015). In that case, the plaintiff association discovered decay in two condominium buildings in 2011. It tendered to State Farm under a policy in effect from 1992 to 1998 that covered loss to property “involving collapse of a building or any part of a building caused only by . . . (2) hidden decay.” The policy did not define the term “collapse.” After State Farm denied the claim, the association sued for breach of contract. Entering summary judgment for State Farm, the Western District of Washington held that collapse required an imminent threat that a building would fall down during the policy period. On appeal, the Ninth Circuit asked the Washington Supreme Court to define “collapse.”

The Supreme Court found the term to be ambiguous, in part because other courts had not defined it uniformly. The court adopted the broadest of the three most common definitions. But, of utmost important to insurers, the court noted that “substantial impairment” of “structural integrity” means an impairment so severe as to materially impair a building’s ability to remain upright. While adopting the most expansive collapse definition seems like a loss for carriers, the Court’s “substantial impairment plus” definition is really a victory.  The Ninth Circuit applied the new definition on remand and affirmed dismissal because it was implausible that the buildings suffered substantial impairment of structural integrity in 1998, given that they were still standing in 2016. Queen Anne Park Homeowners Ass’n v. State Farm Fire & Cas. Ins. Co., 633 F. App’x 415, 417 (9th Cir. 2016).

In a more recent case, the Western District applied the same reasoning. The court concluded that it was “implausible” that an apartment building had a severe impairment of its ability to remain upright between 1999 and 2002 when the building remained standing without renovation in 2014. Am. Econ. Ins. Co. v. CHL, LLC, No. C15-899 RSM, 2016 WL 3632488, at *4 (W.D. Wash. July 7, 2016) (Martinez, J.). The court decided, as a matter of law, in favor of American Economy because the building could not have reached a state of collapse during the policy period, which had ended more than a decade earlier.

The Ninth Circuit’s decision on remand in Queen Anne Park and the Western District’s decision in American Economy place a reasonable limit on policyholders’ ability to recover for collapse under long-expired policies: as a matter of law, a building that is still standing could not have been in a state of substantial impairment of structural integrity years earlier. While no Washington State court has adopted this position, it is hard to see how they could take issue with this reasoning.

~Matthew Munson