Zoo Properties, LLP v. Midwest Family Mutual Insurance Co.

#25667-rev & rem-JKM
2011 S.D. 11IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
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ZOO PROPERTIES, LLP and
ABERDEEN ZOO, INC.
d/b/a THE ZOO, Plaintiffs and Appellants,
v.
MIDWEST FAMILY MUTUAL
INSURANCE COMPANY, Defendant and Appellee.
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APPEAL FROM THE CIRCUIT COURT OF
THE FIFTH JUDICIAL CIRCUIT
BROWN COUNTY, SOUTH DAKOTA
* * * *
HONORABLE JACK R. VON WALD
Judge
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THOMAS P. TONNER of
Tonner, Tobin and King, LLP Attorneys for plaintiffs
Aberdeen, South Dakota and appellants.
ERIC R. JOHNSON of
Davenport, Evans, Hurwitz &
Smith, LLP Attorneys for defendant
Sioux Falls, South Dakota and appellee.
* * * *
CONSIDERED ON BRIEFS
ON JANUARY 10, 2011
OPINION FILED 03/23/11
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MEIERHENRY, Justice
[¶1.] Zoo Properties, LLP and Aberdeen Zoo, Inc. (Zoo Properties) filed a
claim under its business owner’s insurance policy to cover the expenses to fix a
sagging ceiling resulting from cracked joists. A provision in the policy covered
damage due to “risks of direct physical loss involving collapse of a building.” The
policy provider, Midwest Family Mutual Insurance Co. (Midwest Family Mutual),
denied coverage claiming that the policy language only covered total collapse of the
building. The parties filed cross motions for summary judgment. The circuit court
determined that the policy did not provide coverage. As a result, the circuit court
granted summary judgment for Midwest Family Mutual. Zoo Properties appeals,
arguing that the policy provides coverage. We reverse and remand for further
proceedings.
Facts
[¶2.] In March 2009, Zoo Properties became aware that the ceiling joists
between the first and second floors of its building were cracked. Zoo Properties
submitted a claim to Midwest Family Mutual under its business owner’s policy to
pay for the repair costs. Both parties hired engineers to determine the extent of the
damage. The engineers found that the joists were cracked but that the second floor
had not collapsed to the ground. One engineer, however, stated that collapse was
inevitable and that the building would be unsafe without repair.
[¶3.] Midwest Family Mutual denied Zoo Properties’ claim on the basis that
the policy was unambiguous and only covered total collapse of the building. The
policy provided coverage for “collapse” as follows:
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d. Collapse
We will pay for loss or damage caused by or resulting
from risks of direct physical loss involving collapse of a
building or any part of a building caused only by one or
more of the following:
...
(4) Weight of people or personal property;
(5) Weight of rain that collects on a roof;
...
Collapse does not include settling, cracking, shrinkage,
bulging or expansion.
(Emphasis added.) The term “collapse” was not otherwise defined.
[¶4.] The circuit court agreed with Midwest Family Mutual and determined
that the policy only covered total collapse of the building, not cracking joists. On
appeal, Zoo Properties argues that the circuit court’s interpretation of the policy is
incorrect. Zoo Properties claims that the provision is ambiguous and should be
construed to cover the cracking joists because they would have eventually caused
the ceiling to collapse.
Analysis
[¶5.] It is settled that we review the interpretation of insurance contracts de
novo. Zochert v. Nat’l Farmers Union Prop. & Cas. Co., 1998 S.D. 34, ¶ 5, 576
N.W.2d 531, 532 (citation omitted). “We have developed special rules of
construction that apply when interpreting an insurance policy.” Chord v. Reynolds,
1999 S.D. 1, ¶ 14, 587 N.W.2d 729, 732 (citation omitted). If an insurance policy’s
provisions are fairly susceptible to more than one interpretation, we apply the “rule
of liberal construction in favor of the insured and strictly against the insurer[.]” Id.If the “rules of interpretation leave a genuine uncertainty as to which of two or
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more meanings is correct,” the policy is ambiguous. Alverson v. Nw. Nat’l Cas. Co.,
1997 S.D. 9, ¶ 8, 559 N.W.2d 234, 235 (citations omitted).
[¶6.] Zoo Properties argues that the term “collapse” is ambiguous. As
support, Zoo Properties points to other jurisdictions that have interpreted the exact
policy provision at issue here. Zoo Properties asserts that the “majority view
recognizes that the definition of collapse does not require the structure to fall to the
ground.” Instead, Zoo Properties submits that the policy’s collapse provision is
satisfied when there is a “substantial impairment of the structural integrity of the
building[.]” Consequently, Zoo Properties contends that an issue of material fact
exists whether the building suffered a “substantial impairment” from the cracked
joists.
[¶7.] In response, Midwest Family Mutual argues that the plain language of
the insurance contract must be read to define “the verb ‘collapse’” as: “1) to break
down completely: fall apart in confused disorganization: crumble into insignificance
or nothingness; 2) to fall or shrink together abruptly and completely: fall into a
jumbled or flattened mass through the force of external pressure: fall in; 3) to cave
in, fall in or give way: undergo ruin or destruction by or as if by falling down:
become dispersed. . . .” Collapse Definition, Merriam-Webster’s Third New
International Dictionary Unabridged, http://www.mwu.eb.com/mwu (last visited
Feb. 7, 2011). In applying these definitions, Midwest Family Mutual contends that
it is undisputed that the cracked joists did not lead to collapse because the ceiling
never fell, rather it merely sagged. Midwest Family Mutual also argues that the
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policy provision that excludes “cracking” applies to the cracked joists and precludes
coverage.
[¶8.] As noted by Zoo Properties, other jurisdictions have found the exact
policy language at issue here ambiguous. In Ocean Winds Council of Co-owners,
Inc. v. Auto-Owner Insurance Co., the South Carolina Supreme Court accepted a
certified question to “interpret a property insurance policy providing coverage for
‘risks of direct physical loss involving collapse of a building or any part of a
building.’” 565 S.E.2d 306, 307 (S.C. 2002). Like this case, the insurance policy in
Ocean Winds also included the exclusionary language that “[c]ollapse does not
include settling, cracking, shrinkage, bulging, or expansion.” Id. In analyzing this
policy language, the court noted that “the word ‘collapse’ as used in property loss
insurance policies has spawned much litigation.” Id. (citing What Constitutes
“Collapse” of a Building Within Coverage of Property Insurance Policy, 71 A.L.R.3d
1072 (1976)).
[¶9.] The Ocean Winds court recognized that the “modern trend is to find
the word ‘collapse’ ambiguous[.]” Id. The court also noted that the “courts finding
the word [collapse] unambiguous . . . have generally construed it to mean ‘a falling
in, loss of shape, or reduction to flattened form or rubble.’” Id. at 307-08 (citing
Am. Concept Ins. Co. v. Jones, 935 F. Supp. 1220 (D. Utah 1996); Fantis Foods, Inc.
v. N. River Ins. Co., 753 A.2d 176 (N.J. Super. Ct. App. Div. 2000); Rankin v.
Generali-U.S. Branch, 986 S.W.2d 237 (Tenn. Ct. App. 1998) and cases cited
therein). Further, the court determined that most cases interpreting this policy
language “involve[d] . . . the single word ‘collapse’ and not the entire phrase at
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issue here: ‘risks of direct physical loss involving collapse.’” Id. at 308 (citing
Doheny W. Homeowners’ Ass’n. v. Am. Guar. & Liab. Ins. Co., 70 Cal.Rptr.2d 260(Cal. Ct. App. 1997)). But, “as noted by one of the few courts to construe this exact
phrase, [the entire phrase ‘risks of direct physical loss involving collapse’] is even
more ambiguous than the use of the word ‘collapse’ alone.” Id. (citing Doheny W.,
70 Cal.Rptr.2d at 260).
[¶10.] The Ocean Winds court identified three approaches for interpreting the
term collapse. The first approach requires that the collapse be imminent before
coverage exists. Id. (citing Whispering Creek Condo. Owner Ass’n v. Alaska Nat’l
Ins. Co., 774 P.2d 176 (Alaska 1989); Doheny W., 70 Cal.Rptr.2d at 260; Fantis
Foods, 753 A.2d at 176). “‘Imminent’ means collapse is ‘likely to happen without
delay; impending or threatening;’ and requires a showing of more than substantial
impairment.” Id. (citing Doheny W., 70 Cal.Rptr.2d at 260). The second approach
only requires showing a “substantial impairment” to the building. Id. (citing Island
Breakers v. Highlands Underwriters Ins. Co., 665 So.2d 1084 (Fla. App. 1995);
Rankin, 986 S.W.2d 237). This approach is the “most lenient standard.” Id. The
third approach requires “actual collapse” and is the “most stringent” of the three
approaches. Id. (citing Fid. & Cas. Co. of N.Y. v. Mitchell, 503 So.2d 870 (Ala. Civ.
App. 1987); Heintz v. U.S. Fid. & Guar. Co., 730 S.W.2d 268 (Mo. Ct. App. 1987)).
[¶11.] As a preliminary matter, we determine that the policy language at
issue here – “[w]e will pay for loss or damage caused by or resulting from risks of
direct physical loss involving collapse of a building” – is ambiguous. The Ocean
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Winds analysis demonstrates the ambiguity because insurance contracts using the
same “collapse” provision are capable of at least three different constructions.
[¶12.] After reviewing this issue, we elect to follow those jurisdictions that
have adopted the first approach, which define collapse to include not only actual
collapse, but also imminent collapse. Imminent collapse is defined as “likely to
happen without delay; impending or threatening; and requires a showing of more
than substantial impairment.” Ocean Winds, 565 S.E.2d at 308 (citing Doheny W.,
70 Cal.Rptr.2d at 260). This approach is the reasonable middle ground between the
second approach, advanced by Zoo Properties, and the third approach, advanced by
Midwest Family Mutual. As noted in Ocean Winds, the second approach’s
“substantial impairment” requirement broadly permits recovery for damage that,
“while substantial, does not threaten collapse.” Id. Conversely, the third
approach’s requirement narrowly permits recovery for damage from “actual
collapse.” See id. As a result, the most reasonable construction of the term
“collapse” is to define it to include “imminent collapse.” 1
Conclusion
[¶13.] Adopting the moderate first approach “protects the insured without
distorting the purpose of the clause to protect against damage from collapse.”
1. The imminent collapse standard still recognizes the cracking exclusion
present in the policy. The exclusion provides that “[c]ollapse does not include
settling, cracking, shrinkage, bulging or expansion.” In most instances,
cracking will likely precede imminent and total collapse. But, as a matter of
common sense, the cracking exclusion cannot serve to undermine the
imminent collapse standard when cracking often precedes collapse. The
excluded cracking is of the same nature and magnitude as “shrinkage,
bulging or expansion.”
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Ocean Winds, 565 S.E.2d at 308. And unlike the second and third approaches,
requiring imminent collapse does not require this Court to make a forced
construction of the term in either party’s favor. See Gloe v. Union Ins. Co., 2005
S.D. 30, ¶ 29, 694 N.W.2d 252, 260. Furthermore, the first approach’s construction
of collapse provides coverage for imminent collapse, which eliminates the incentive
for policyholders to risk injury to others while waiting for actual collapse. 2 We,
therefore, reverse the circuit court’s grant of summary judgment and remand for
proceedings consistent with this opinion.
[¶14.] GILBERTSON, Chief Justice, and KONENKAMP, ZINTER, and
SEVERSON, Justices, concur.
2. Bruner and O’Connor’s treatise recognizes that “[b]roader coverage [of
collapse provisions] is sometimes justified on the grounds that to restrict
policy benefits to instances where the building actually falls down creates an
incentive to forego repairs to avert imminent collapse.” 4 Philip L. Bruner &
Patrick J. O’Connor, Bruner and O’Connor on Construction Law § 11:230
(2010) (citing Royal Indem. Co. v. Grunberg, 155 A.D.2d 187, 189, 553
N.Y.S.2d 527 (3d Dep’t 1990) (agreeing with “numerical majority of American
jurisdictions [that] a substantial impairment of the structural integrity of a
building is said to be a collapse” because to require the building to fall down
would be “unreasonable” in light of an insured’s duty to protect property from
further damage). See also Assurance Co. of Am. v. Wall & Assocs. LLC of
Olympia, 379 F.3d 557 (9th Cir. 2004) (policy covered not only actual collapse
but also imminent collapse)) (parenthetical explanations from Bruner and
O’Connor). See generally 10A Couch on Insurance 3d § 148:54 (2010)
(citations omitted).
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