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Insurance Coverage for Collapse of a Building Is Narrowly Defined in California

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Property damage policies insuring buildings often provide coverage for collapse of the building. Litigation has arisen regarding whether collapse coverage requires an actual collapse, or whether the policy also provides coverage for imminent collapse or substantial impairment of the structure’s integrity. A recent case answers this question adversely to insureds and narrowly construes collapse coverage under California law.

The California Court of Appeal, Second Appellate District, based in Los Angeles, recently decided Tustin Field Gas & Food, Inc. v. Mid-Century Ins. Co. (2017) 13 Cal.App.4th 220. In Tustin Field Gas & Food, the insured owned a gas station, and gas was dispensed from underground fiberglass tanks. (Id. at 223.)

During an inspection, the insured discovered that the “fiberglass sheath on the underside” of the tank had a “long narrow crack.” (Id.) The loss occurred because the construction company negligently placed the tank on a rock next to air pockets, and the tank and rock split. (Id. at 228.) Although the inside of “the inner steel wall” of the tank remained intact, the tank was unusable until repaired. (Id. at 228.)

The court in Tustin Field Gas & Food analyzed California case law addressing collapse coverage. The insured had argued that the “substantial impairment of structural integrity” of a building triggers collapse coverage. (Id. at 228.) Tustin Field Gas & Food rejected that conclusion. The court pointed out that the policy excludes from the definition of collapse “settling, cracking, shrinkage, bulging, or expansion.” (Id. at 224.) The Tustin Field Gas & Food court cited prior case law in California addressing collapse coverage, concluding that this exclusion for “settlement and the like” precludes collapse coverage where a building’s structural integrity has been substantially impaired, but an actual collapse has yet to occur. (Id. at 227.)

The Tustin Field Gas & Food court also rejected the insured’s argument that “public policy favors a broader definition of collapse.” The insured argued that if collapse coverage is interpreted narrowly, there would be little incentive for insureds like the plaintiff to “repair lesser damage to their tanks, which could result in interim damage to the environment.” (Id. at 230.) The court held that, under California Supreme Court precedents, such policy considerations would be an impermissible “public-policy-based rewrite” of the policy. (Id.)

Finally, the court stated that even under a broad interpretation of the definition of collapse, which exists where a policy covers “risks” of collapse, there would be no coverage.  The Tustin Field Gas & Food court held that it reached this conclusion because the exclusion for “settling, cracking, shrinkage, bulging, or expansion” prevents coverage where there is merely a substantial impairment of structural integrity without an actual collapse. (Id. at 231.)

Under Tustin Field Gas & Food, policies providing collapse coverage—but containing an exclusion for “settling, cracking, shrinkage, bulging, or expansion” of a building—will likely not provide coverage absent actual collapse.  This is a favorable opinion for insurance companies.  All insureds making an insurance claim for collapse of a building should be aware of and closely analyze this opinion.

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