Three months ago in Equinox on the Battenkill Mgmt. Ass’n. v. Philadelphia Indem. Ins. Co., 2015 VT 98 (Vt., Aug. 7, 2015), Vermont’s highest court held that a policy insuring against the “risks of . . . collapse” affords considerably broader coverage than one insuring against “direct loss [by] collapse.”  While the latter covers only a falling in, the former encompasses situations in which collapse is imminent and perhaps even situations in which “the insured building’s structural integrity has degraded to the point where it cannot be safely and reliably used.”  The case is a cautionary tale for underwriters everywhere, and it also contains a useful survey of “risk of collapse” jurisprudence from around the country.

The policyholder was a management association that operated a condominium complex in Manchester.  Many of the units had cantilevered balconies, and those began experiencing structural problems in 2007.  By 2012, it had become apparent that joists under the balconies had suffered moisture infiltration leading to rot and deterioration, and a structural engineer recommended that they be taken out of service altogether.  According to the insurer’s expert, this was attributable to “construction and design issues.”

The insured made claim, contending that it suffered a compensable loss under an additional coverage afforded for the peril of collapse occasioned by “hidden decay;” the joists had never been inspected or exposed prior to 2012.  The claim was denied, however, because the contract of insurance excluded loss caused by “[f]aulty, inadequate, or defective . . . [d]esign, specifications, workmanship, repair [or] construction.”

The policyholder responded with a declaratory judgment action, and cross-motions for summary judgment were filed.  The insurer had also argued that none of the balconies had actually suffered a collapse, citing Gage v. Union Mut. Fire Ins. Co., 122 Vt. 246, 169 A.2d 29 (1961) for the proposition that to collapse meant “[t]o fall together suddenly” or “[t]o fall together or into an irregular mass or flattened form, through loss of firm connection or rigidity or support of the parts or loss of the contents.”  The trial court agreed, and an appeal to Vermont’s Supreme Court followed.  On August 7th, the state’s highest court reversed and remanded.

Speaking for four of the five justices, Chief Justice Paul Reiber held that Gage did not control.  The policy in the 1961 case covered “all direct loss to property by . . . [c]ollapse;” the association’s policy, on the other hand, afforded coverage for “risks of direct physical ‘loss’ involving collapse of ‘buildings’ or any part of ‘buildings.’ “ As the Chief Justice explained, “[t]he difference in language is great.”

Here . . . the policy contains additional language beyond “collapse.”  The balconies may incur damage from a “risk of direct physical ‘loss’ involving collapse” even where they have not detached and completely fallen away from the buildings. . . . Such language may even expressly expand the scope of coverage if a court finds that a catastrophic failure is imminent or that the insured building’s structural integrity has degraded to the point where it cannot be safely and reliably used.

Because it held that “[t]he single word ‘collapse’ and the phrase ‘risk of loss involving collapse’ cannot mean the same thing,” the court was forced to craft the definition of the broader grant of coverage.  After canvasing cases from a number of other jurisdictions, the decision concluded “that ‘a risk of direct physical loss involving collapse’ means a risk of imminent collapse.”

The insured had invoked the old canard of ambiguity, but the majority opinion declined to reach that issue, saying instead that both the factual question of whether there had been an insured risk of collapse here and the question of whether the policy was ambiguous in nature should be decided in the first instance by the trial court.   That prompted Justice Beth Robinson to write a lengthy and trenchant descent.  While she agreed with the majority’s construction of the additional coverage for collapse, she stated that the panel could and should have resolved both legal question of whether the contract of insurance was ambiguous and the ultimate question of whether there was sufficient evidence in the appellate record to allow the high court to determine coverage for good and all.