In Fabozzi v. Lexington Insurance Company, the United States Court of Appeals for the Second Circuit has reaffirmed that ambiguities in an insurance policy must be construed against the insurer.

The Fabozzis were renovating their home when they learned that its interior walls were so rotted that the entire house was actually in the process of collapsing. Faced with the complete loss of their home, the Fabozzis understandably turned to their homeowners’ insurer, Lexington Insurance. The homeowners’ policy provided coverage for collapse caused by certain named perils, including hidden decay. But the policy also required that the collapse be “caused only by one or more of” the named perils. That simple, 7-word phrase led to Lexington’s denial of coverage and a decade of litigation.

The Fabozzis read the phrase as providing coverage “only if the collapse is caused by one of the following.” In other words, they simply needed to prove that one of the listed perils caused the collapse, even if other non-listed perils contributed.  Lexington argued that the phrase limited coverage to a collapse “caused exclusively by one or more of the following.” In other words, if any non-listed peril contributed to the collapse, the Fabozzis were out of luck.

The trial court agreed with Lexington and instructed the jury that the policy required a collapse caused exclusively by a named peril. Based on that instruction, the jury found in favor of Lexington.

The Second Circuit disagreed, finding that the trial court had failed to heed a basic tenet of insurance coverage: policies are to be construed in favor of the insured’s reasonable expectations.  Any reasonable person whose home had collapsed would expect the policy to provide coverage if the collapse was mostly due to a named peril. “Few would suppose that coverage would be denied merely because some other factor contributed to the event in a minimal, more attenuated way.” Because the trial court was wrong to give preference to the insurer’s interpretation, the jury verdict was vacated, and the case was remanded for a new trial or other proceedings.

The Second Circuit also addressed the burden of proof, agreeing with the trial court’s finding. Unlike the all-risk provisions of the policy generally, the additional coverage section (including collapse) provided named-peril coverage. That gave the Fabozzis the burden of proving that the collapse was the result of a named peril, rather than making Lexington prove that the loss was caused by an excluded peril.