In light of a recent California Supreme Court decision, property owners face a dilemma when deciding whether to repair imminent damage.  The California Supreme Court recently decided that the public policy in favor of enforcing specific policy language outweighs the public policy in favor of mitigating imminent property damage.  Rosen v. State Farm General Ins. Co., 30 Cal.4th 1070 (June 12, 2003).  In Rosen, the California Supreme Court reversed a decision of the Court of Appeal, holding that a homeowner’s policy that expressly defines the term “collapse” as “actually fallen down or fallen into pieces” must, for reasons of public policy, provide coverage for imminent collapse.  While the Rosen decision may exclude coverage for some insureds with hazardous conditions in a state of imminent collapse, it also stresses the importance for insureds to review and understand their particular policy language.

Facts of Rosen

The insured submitted a claim to his homeowner’s insurance carrier for the cost of repairing two decks attached to his home.  Although the decks had not yet collapsed, the insured decided to remove and repair the decks upon the recommendation of a contractor who discovered severe deterioration of the framing members supporting the decks.  The insured believed his decks were in a state of imminent collapse, entitling him to policy benefits. 

State Farm denied the claim on the ground that there had been no “actual” collapse of the decks within the meaning of the policy.  The insured filed an action for breach of contract and breach of the implied covenant of good faith and fair dealing against State Farm.  The trial court ruled in favor of the insured, finding that California public policy requires a homeowner’s insurance policy to cover imminent collapse despite contrary policy language.

The Court of Appeal Decision in Favor of
the Insured

The California Court of Appeal affirmed the trial court although it found that the policy’s plain definition of “collapse” was unambiguous and susceptible of only one reasonable interpretation – actual collapse of a building or a portion thereof.  Nevertheless, the Court of Appeal held, as a matter of public policy, that State Farm was obligated to provide coverage for the imminent collapse of the decks, irrespective of policy language.  The court found that requiring an insurer to provide coverage when collapse is imminent was in the best interest not only of the insured and the insured’s visitors, but also the insurer.  Fixing the problem prior to an actual collapse may well save lives and money.  The court also found that its holding would not unduly burden the insurer because the loss was imminent and would occur soon anyway. 

The Supreme Court Opinion: The Plain Language Approach

The California Supreme Court disagreed, holding that the Court of Appeal erred in failing to apply the plain, unambiguous language of the policy.  The supreme court refused to rewrite the coverage provision of State Farm’s homeowner’s insurance policy to remove this restriction.  The court, relying upon its earlier holdings, reminded lower courts to interpret and apply the plain language of the policy at issue.  See Certain Underwriters at Lloyd’s of London v. Superior Court, 24 Cal. 4th 945, 968 (2001) (“[W]e do not rewrite any provision of any contract, [including an insurance policy], for any purpose.”); Foster-Gardner, Inc. v. National Union Fire Ins. Co., 18 Cal. 4th 857 (1997) (holding that, under the standard CGL policy, an insurer’s duty to defend its insured in a “suit seeking damages,” was limited to a civil action prosecuted in court).  By agreeing to this particular insurance contract, the insurer made promises, and the insured paid premiums, against the risk of a specified loss.  The Rosen court reasoned that, under the standard CGL policy, to rewrite the provision imposing the duty to indemnify to remove its limitation to actual collapse would compel the insurer to give more than it promised and would allow the insured to get more than it paid for, denying the parties their freedom to contract as they please.

The supreme court, however, specifically distinguished the lack of ambiguity in the collapse provision at issue from cases involving policies that do not specifically define “collapse.”  See Doheny West Homeowners’ Ass’n v. American Guarantee & Liability Ins. Co., 60 Cal. App. 4th 400 (1997).  In Doheny West, a homeowners’ association of a large condominium complex sued its property insurer, alleging that certain property was in a state of imminent collapse, and that the insurer had wrongfully denied a claim for the repairs the association made to the structure.  The policy at issue in Doheny West did not restrict the definition of collapse to “actual” collapse.  Instead, the policy excluded coverage for collapse except “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” resulting from specified causes.  The California Court of Appeal held that the Doheny West policy embraced imminent as well as actual collapse, and found for the insured.  The supreme court endorsed that result in Rosen, even though it found that the unambiguous collapse provision at issue could not be construed to extend coverage beyond actual collapse.

Potential Impact of Rosen

This decision creates a predicament for insureds who are faced with deciding whether or not to repair imminent damage.  We strongly recommend that insureds carefully review their policies, and seek advice if their particular policy language raises questions about whether repairs are covered. 

Rosen stresses the importance of plain and unambiguous policy language: a clear definition of “collapse” (or any other policy definition) will be subject to literal enforcement.  Less clear definitions, however (such as the definition of “collapse” in Doheny West), are more likely to lead to coverage. 

The Rosen decision may place constraints on the ability of insureds to obtain coverage for property in a state of imminent collapse.  Insureds faced with property in a state of imminent collapse coupled with a policy provision limiting coverage to “actual” collapse simply cannot stand by and wait for the collapse to occur.  The potential for liability associated with maintaining a hazardous condition provides an incentive to property owners to fix their property immediately.  If there is no coverage for property in a state of imminent collapse, the insured should also consider whether knowledge of such a condition in one policy period will create a gap in coverage or preclude coverage in later policy periods.