In Joy Tabernacle—The New Testament Church v. State Farm Fire & Cas. Co., No. 14–2160 (6th Cir. June 22, 2015), the Sixth Circuit Court of Appeals held that the term "decay" in a property insurance policy's coverage extension for "collapse" should be construed broadly to encompass gradual deterioration over a long period of time.
The court also held that a general policy exclusion for defective design or construction is not applicable to the collapse coverage extension.
Factual and Procedural Background
In Joy Tabernacle, the ceiling of a church that was built in 1927 collapsed in 2012. A State Farm policy covering the church premises was in effect at the time of loss. The State Farm policy provided coverage for "accidental direct physical loss" and contained general exclusions for "collapse," as well as several other types of loss including wear and tear, decay, settling, cracking, shrinking, and defective design. Although losses caused by "collapse" were generally excluded, the State Farm policy included a coverage extension for "collapse," which provided:
b. We will pay for accidental direct physical loss to Covered Property caused by collapse of a building or any part of a building that is insured under this coverage form or that contains Covered Property insured under this coverage form, if the collapse is caused by any one of more of the following:
(1) any of the "specified causes of loss" ...
(2) Decay that is hidden from view unless the presence of such decay is known to an insured prior to collapse....
(6) Use of defective material or methods in construction, remodeling or renovation if the collapse occurs during the course of the construction, remodeling or renovation. However, if the collapse occurs after construction, remodeling or renovation is complete and is caused in part by a cause of loss listed in Paragraphs (1) through (5), we will pay for the loss even if use of defective material or methods in construction, remodeling or renovation contributes to the collapse.
State Farm denied coverage for the collapsed ceiling, relying on its engineer's opinion that there was "no significant decay that was hidden from view that was observed that could be the cause of the plaster ceiling collapse."
Joy Tabernacle sued State Farm alleging breach of contract and violation of Michigan's Unfair Trade Practices Act. The district court granted summary judgment in favor of State Farm. The district court held that the collapse was excluded from coverage pursuant to the policy's exclusions for loss resulting from settling, cracking, shrinking, and expansion, as well as faulty design. The district court also held that the collapse coverage extension was not triggered because Joy Tabernacle did not produce any evidence of "hidden decay," which the district court interpreted narrowly to include only "organic rot." Joy Tabernacle appealed the district court's decision and argued in the Sixth Circuit that (1) the district court erred in applying a narrow definition of "decay" as used in the policy's collapse coverage extension, and (2) the district court erred in applying the policy's general exclusions to the provisions of the collapse extension.
"Decay" May Include "Gradual and Progressive Decline"
In addressing Joy Tabernacle's first argument, the Sixth Circuit noted that the policy itself provided no definitive guidance regarding the definition of "decay" and thus looked to general dictionary definitions, which encompassed both "organic rot" and a broader reference to a general decline or degradation over time. It then reviewed two noncontrolling decisions cited by each of the parties—a Michigan Court of Appeals opinion, Hani & Ramiz, Inc. v. North Pointe Ins. Co., No. 316453, 2013 Mich. App. LEXIS 2035 (Mich. Ct. App. Feb. 4, 2014), and a Western District of Michigan opinion, Travelers Prop. Cas. of Am. v. Eyde Co., No. 5:05-CV-168, 2007 U.S. Dist. LEXIS 1674 (W.D. Mich. Jan. 9, 2007).
In Hani & Ramiz, the court held that the collapse of a grocery store roof from the weight of snow and ice on wooden trusses that had weakened due to treatment with flame-retardant chemicals was covered because the policy's collapse coverage included "decay," which the court construed to include deterioration due to the chemical treatment of wood. The Hani & Ramiz court relied on a common dictionary definition of "decay" as "a gradual and progressive decline."
In Eyde, the court found that the "decay" exception in the collapse coverage did not apply where the roof of a building constructed in 2001 collapsed in 2005 due to defective design that caused nails to loosen from the trusses and the overall strength of the building to weaken. The Eyde court relied on a definition of "decay" as "organic rot or deterioration from a normal state" but recognized that decay under this definition can occur over a long period of time. The Eyde court distinguished the facts of its case from the facts in two out-of-state cases, both of which held that "hidden decay" was a cause of loss where the buildings at issue had been exposed to the elements over several decades.
The Sixth Circuit determined that the deterioration of a 90-year-old church roof structure in this case was unlike the 4-year-old building with loosened nails at issue in Eyde and more similar to the Eyde court's description of the older buildings in the two out-of-state cases in which wood and mortar weakened over time due to age and extended exposure to the elements. The court concluded that decay may have been what "caused in part" the church's ceiling to collapse and that summary judgment was inappropriate because the record presented a dispute of material fact regarding the role that humidity and water damage played in weakening the wood trusses of the church over a long period of time.
Coverage Extensions Trump General Policy Exclusions
In addressing Joy Tabernacle's second argument, the Sixth Circuit noted that State Farm bore the burden of proving that the general policy exclusions for cracking and defective design or construction were applicable, that exclusions are strictly construed in favor of the insured, and that a specific contract provision generally controls over a more general contract provision. Applying these general principles, the Sixth Circuit concluded that, when "read in context and in conjunction with the collapse extension, the general exclusions for defective design and cracking do not foreclose coverage if the collapse extension is triggered." With regard to defective design, the court explained that, "[u]nder the specific terms of the collapse extension, defective materials or methods of construction cannot preclude coverage where an enumerated cause of loss [i.e., decay] is the other cause of loss." With regard to cracking, the court explained that "[t]o find that a general exclusion for 'cracking' precludes coverage where collapse actually occurred renders the entire collapse extension nugatory, as the collapse of a structure often involves the cracking of beams and walls." The court concluded that, in light of the plain language of the policy, State Farm could not carry its burden of providing that the policy's general exclusions applied to the collapse coverage extension.
This case illustrates the importance of understanding one's coverage. The interplay between the extension of coverage for collapse and the rest of the policy was outcome determinative. A policyholder must understand that, absent language to the contrary, a coverage extension usually stands on its own. Thus, the named perils in the collapse extension applied to delineate the scope of the collapse coverage, not the policy's general exclusions.
With a clear understanding of the policy, the insured can focus the investigation into the cause of loss on what is important—here, whether the collapse was caused by one of the named perils on the coverage extension. By misunderstanding its own policy, the insurer focused, at least in part, on the wrong issues—that is, defective design. That improper focus detracted from the main issue, which was hidden decay. The result was wasted effort and increased expense for all concerned.
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