A New York trial court recently addressed the definition of “collapse” and the meaning of the ensuing loss clause in Copacabana Realty LLC v. Fireman’s Fund Insurance Company, No. 10-2919, 2013 NY Slip Op 30960(U) (NY Sup. Ct. Suffolk County Apr. 29, 2013), granting the defendant insurer’s motion for summary judgment on both issues and may be useful to insurers facing lawsuits in New York involving those issues.

The Bikoffs purchased a home knowing it needed “extensive renovations” and hired a project manager and contractors to perform the needed work. Id. at *2.  But “the contractors performed shoddy work, and . . .  several defects in the house, including the sagging kitchen floor, became apparent during the renovation.” Id.  The work was so bad that the Bikoffs moved out of the home to allow remediation, but “some of the problems became progressively worse” and an independent general contractor found “the previous contractors were negligent in almost every aspect of the work they performed.” Id.

The Bikoffs made a claim under a policy underwritten by American Automobile Insurance Company (“AAIC”). Id. at *1.  AAIC’s adjuster examined the house in the presence of the insureds, the insureds’ engineers, and the insureds’ insurance agent, noting that the kitchen floor “had gaps and was sagging in the middle of the room” and that “holes had been made in [the joists supporting the kitchen floor] to facilitate electrical wiring and plumbing.”  Id. at *2.

The “Additional Property Coverages” in the policy provided:

We cover direct physical loss to covered property that results from a collapse cause by . . . use of defective material or methods in construction, remodeling or renovation if the collapse occurs during the course of construction, remodeling or renovation.

Id. at *3.  The policy defined “collapse” as:

the actual, abrupt falling down of a building or part of a building.  A collapse occurs only when a building or part of a building has actually and abruptly fallen down. Collapse does not mean a condition of a building including cracking, bulging, sagging, bending, shifting, leaning, settling, shrinkage, or expansion, that could lead to or contribute to its actual, abrupt falling down.

Id.  The “Property Losses Not Covered” section of the policy provided that AAIC:

will not pay loss caused by or resulting from any of the following: . . . inherent vice, hidden or latent defect or any quality in property that causes it to damage or destroy itself . . . settling, shrinking, bulging or expansion, including resultant cracking . . . We do not cover losses caused by. . . faulty inadequate or defective . . . design, specifications, workmanship, repair, construction, renovation, remodeling.

Id. 

AAIC denied the Bikoffs’ claim, noting “[t]he description of loss indicated your kitchen floor has settled due to improper or inadequate construction . . . We inspected you [sic] residence . . . Based on this inspection, it is our opinion that the damage is related to improper construction and or workmanship by the contractor.” Id.  The denial letter then quoted the “defective or inadequate workmanship” exclusion in full. Id. The insureds assigned their rights to the Plaintiff, which sued for breach of contract. 

AAIC moved for summary judgment, arguing that the damages were caused by the faulty workmanship of independent contractors hired to perform renovations to the property. Id. at *2.  The court agreed, first noting that AAIC had demonstrated that the defective or inadequate workmanship exclusion “clearly and unambiguously applies” to the loss. Id. at *4.  The court emphasized that the insureds and the insureds’ independent general contractor “both confirm that the damage to the property arose from inadequate and defective workmanship by contractors.”  Id.

The court rejected two noteworthy arguments by the Plaintiff. First, Plaintiff argued that the damage was an “ensuing loss” that fell within the exception to the faulty workmanship exclusion. The court rejected the argument, noting while “an ensuing loss claim may be appropriate where the initial defect caused wholly separate damage to another portion of the building’s structure, where, as in this case, there was no such collateral or subsequent damage, the ensuing loss exception does not apply.” Id. at *4 (emphasis added) (citations omitted). 

Second, Plaintiff argued that the loss was a covered collapse. The court agreed that the policy provided coverage for collapse due to defective materials or methods of construction or renovation, but held the instant loss was simply not a collapse. The court noted that “the agreement specifically limits coverage to a collapse that occurs during the course of such construction,” that the agreement defines collapse as “the actual, abrupt falling down of a building or part of a building,” and that the policy defines collapse as not referring to “cracking, bulging, sagging, bending, shifting, leaning, settling, shrinkage, or expansion, that could lead to or contribute to its actual, abrupt falling down.”  Id. 

The court also distinguished Royal Indem. Co. v. Grunberg, 553 N.Y.S.2d 527 (3d Dept 1990), in which the court had held that a “substantial impairment of the structural integrity” was sufficient to constitute a collapse. The Copacabana court held the “substantial impairment” concept does not apply “where, as here, the language of the subject agreement unambiguously limits collapse to an ‘abrupt falling,’ and excludes ‘cracking, bulging and settling’ as sufficient indicia of collapse.”  Id. (citations omitted).

This decision may be useful to insurers litigating issues regarding the interpretation of the ensuing loss clause, or the meaning of “collapse” in property insurance policies.