The District Court for the District of Connecticut denied Allstate's motion to dismiss its insureds’ breach of contract and statutory bad faith claims, finding that the cost to fix damage to the concrete foundation of the insureds’ home may be covered under their policy's collapse provisions. The issue of collapse coverage has been closely followed in Connecticut because as many as 35,000 homes may be at risk of structural unsoundness or collapse due to defective concrete likely linked to a single quarry. With the backdrop of this statewide problem, the decision in Maki v. Allstate Ins. Co., No. 17-cv-01219-WWE, 2018 WL 3057729 (D. Conn. Jun. 20, 2018), grapples with a question of contract interpretation that could have potentially broad and costly implications for insurers and insureds alike.
In Maki, the Connecticut-based plaintiff-homeowners discovered cracking in their home’s foundation. Professional assessment showed that this structural damage was due to a bad mixture of concrete, was unmitigable, and would eventually lead to the home caving in on itself. As a result, the homeowners filed a claim for collapse with Allstate, their insurer. Allstate denied coverage, citing the at-issue policy’s (1) requirement that a collapse be "sudden"; (2) general exclusion for losses caused by cracking walls, defective construction materials, and rust; and (3) requirement that a collapse be "entire." The homeowners sued and Allstate moved to dismiss their complaint.
The Maki court denied Allstate’s motion to dismiss. In reaching its decision, the Court heavily relied upon a broad definition of "collapse" previously applied by the Connecticut Supreme Court in Beach v. Middlesex Mut. Assur. Co., 205 Conn. 246, 253 n.2. (1987); i.e., that a collapse is a "substantial impairment of structural integrity." First, the Court rejected Allstate’s argument that the policy’s use of the term "sudden" amounted to a requirement of "temporal abruptness." Instead, the Court noted that the policy’s coverage of collapse caused by “hidden decay” and the use of defective construction materials contemplated coverage for damage that was inherently gradual. This, coupled with Connecticut's "indeterminate default legal definition of 'collapse'" meant that the Court could not "preclude the possibility that previously undetectable, structurally devastating cracks that appear in a home's foundation without notice could constitute the sudden collapse of a building structure." In the Court's view, the abrupt event was the exposure of the cracks, which, in turn, demonstrated a "substantial impairment" of the home's "structural integrity"; meaning that a reasonable interpretation of the insureds' claim was that there had been a "sudden collapse" of their home's foundation.
Second, the Court rejected Allstate's reliance on the policy's general defective construction exclusion, holding that the collapse coverage constituted an exception to that exclusion because it specifically referenced collapse caused by "hidden decay" and defective construction materials. The Court thus held that the collapse coverage could reasonably be read to supersede the contradictory general exclusion. In other words, losses caused by "hidden decay" or defective construction materials that do not result in "substantial impairment" might be excluded from coverage, but "substantial impairment" caused by or ensuing from "hidden decay" or defective construction materials could reasonably be understood to be within the scope of coverage.
Finally, and again citing to the Beach court's directive that the use of the otherwise undefined term "collapse" affords coverage for "substantial impairment of structural integrity," the Court dismissed Allstate's "entire collapse" argument. In particular, the Court rejected Allstate's argument that "entire" means that at least part of a building "actually fall down," noting that without more by way of policy definitions, "entire collapse" could reasonably be read to mean that the "substantial impairment of structural integrity" was "sufficiently comprehensive in scope." In other words, the homeowners had to, and did, allege that their home's "foundation has completely, without limitation, suffered impairment to its structural integrity" in order to survive a motion to dismiss.
The Court went on to reject Allstate's motion with respect to the insured's statutory claims, finding that the allegation that Allstate regularly refused to attempt in good faith to effectuate settlements of concrete decay claims was sufficient to state plausible claims under Connecticut’s unfair trade practices and unfair insurance practices statutes.
For these reasons, the Court denied Allstate's motion to dismiss in full, but because the question of what constitutes a "substantial impairment of structural integrity" for purposes of applying the "collapse" provision in homeowners' insurance policies, has been certified to the Connecticut Supreme Court, see Karas v. Liberty Ins. Corp., No. 3:13-cv-01836-SRU, 2018 WL 2002480 (D. Conn. Apr. 30, 2018), it did so without prejudice to the insurer’s ability to renew its motion.
Summer associate, Alex Perry, contributed to this blog entry.