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

#25667-rev & rem-JKM

2011 S.D. 11

IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA

* * * *

ZOO PROPERTIES, LLP and
ABERDEEN ZOO, INC.
d/b/a THE ZOO, Plaintiffs and Appellants,

v.

MIDWEST FAMILY MUTUAL
INSURANCE COMPANY, Defendant and Appellee.

* * * *

APPEAL FROM THE CIRCUIT COURT OF
THE FIFTH JUDICIAL CIRCUIT
BROWN COUNTY, SOUTH DAKOTA

* * * *

HONORABLE JACK R. VON WALD
Judge

* * * *

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
#25667

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:

-1-
#25667

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

-2-
#25667

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

-3-
#25667

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

-4-
#25667

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

-5-
#25667

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.”

-6-
#25667

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).

-7-