Last week in Grebow v. Mercury Ins. Co., 2015 Cal. App. LEXIS 948, 2015 WL 6166610 (Cal.App., Oct. 26, 2015), a unanimous panel of California’s intermediate level appellate court rejected arguments that expenses incurred to prevent the collapse of a portion of the policyholders’ house were covered as mitigation.  The court held that the policy provision requiring an insured to protect the property from further damage was not analogous to a sue and labor provision and did not apply until after a loss that already occurred because to hold otherwise would effectively convert the contract of insurance into a maintenance agreement.

The insureds owned a house in Tarzana.  In early 2013, concerned over recurring watermarks, they had a general contractor and a structural engineer inspect the rear deck on the home.  The consultants found severe decay from corrosion in steel beams beneath the structure in an area concealed by the deck floor, and they advised the policyholders that the upper portion of the house was in danger of falling.  The insureds immediately took steps to remediate the home, and they ultimately spent $91,000 in doing so. 

The resulting insurance claim was denied.  The policy excluded loss caused by neglect, corrosion, latent defect, and rust.  There was coverage for collapse from hidden decay, but the contract of insurance recited that the term “collapse” meant “sudden and complete breaking down or falling in or crumbling into pieces or into a heap of rubble or into a flattened mass.”  It also specifically provided that “a substantial impairment of the structural integrity of a structure or building [or] a condition of imminent danger of collapse of a structure or building” was not a collapse.

The policyholders brought suit, asserting that at least a portion of the house had collapsed.  In addition, they contended that their expenditures were incurred to avoid imminent insured damage and should be paid as a result.  The trial court granted summary judgment to the insurer, and last Wednesday a panel of the state’s Court of Appeal agreed and affirmed.

Justice Richard Mosk’s opinion began by dismissing the insureds’ argument that they had sustained a collapse because certain elements of the deck “had become detached.”  While noting that there was a split of authority as to what the undefined term collapse meant, the court stated that the express definition here rendered the collapse clause unambiguous; it was undisputed that no portion of the home or deck had collapsed.

The justices then turned to the contention that the remediation was covered because it was undertaken to avert a loss for which the insurer would be liable.  The contract of insurance contained a mitigation clause reciting that “[i]n case of a loss to which this insurance may apply, you must . . . protect the property from further damage.”  The panel deemed this unambiguous as well, and they ruled that it did the policyholders no good because “[t]he duty to mitigate arises ‘[i]n case of a loss to which this insurance may apply,’ [and here] the only loss to which the insurance may apply is a collapse, which as defined by the policy did not occur.”

The decision held that this provision applied only after a covered loss had already occurred, explaining that “[t]o read the policy as the [insureds] do would mean that virtually all maintenance calculated to prevent ultimately an insurable loss would have to be reimbursed by the insurer . . . thus converting their homeowner’s insurance policy into a maintenance agreement.”

The court noted that an obligation to reimburse did arise under sue and the labor clauses, but it rejected the claim that a mitigation clause is analogous to such a provision.  In Justice Mosk’s view, the dangers of holding otherwise were all too apparent.  In the words of the court:

To imply an obligation to reimburse an insured for preventative acts would result in uncertainty as to when such an obligation can be enforced.  For example, if an insured has a hole in his or her roof, should he or she be able to obtain reimbursement for preventing water damage by fixing the roof?  If a tree is leaning ominously toward a house, is the cost of removing the tree reimbursable?  All maintenance is geared towards preventing an insurable loss.  To have to litigate the point at which maintenance becomes a reasonable step to prevent an imminent insurable loss is an undesirable way to deal with insurance coverage.  Moreover, if insurers are responsible for such reimbursement, they will either raise the cost of insurance or attempt to insert even more explicit clauses precluding such exposure.