131_C145

DEFINITION OF“COLLAPSE” AMBIGUOUS: RULED TO INCLUDE BOTH ACTUAL AND IMMINENT COLLAPSE

Commercial Property	Imminent Collapse
Collapse	Ambiguity

In March 2009, Zoo Properties, LLP and Aberdeen Zoo, Inc. d/b/a The Zoo (Zoo Properties) noticed that the ceiling joists between the first and second floors of its building were cracked. It submitted a claim to Midwest Family Mutual Insurance Company (Midwest) under its business owner’s policy to pay for the repair costs. Zoo Properties and Midwest both hired engineers to determine the extent of the damage. They confirmed that the joists were cracked but that the second floor had not collapsed to the ground. However, one of the engineers stated that collapse was inevitable and that the building would not be safe unless it was repaired.

Midwest denied Zoo Properties’ claim. It based its decision on the basis that the policy was unambiguous and covered only total collapse of the building. The circuit court agreed with Midwest and determined that coverage applied only to total collapse of the building, not cracking joists. Zoo Properties appealed and argued that the circuit court’s interpretation of the policy was incorrect. It claimed that the provision was ambiguous and should have been construed to cover the cracking joists because they would have eventually caused the ceiling to collapse.

The Supreme Court of South Dakota heard the appeal. Zoo Properties argued that the term “collapse” was ambiguous and that there was an issue of material fact as to whether the building sustained a “substantial impairment” from the cracked joists. It also pointed out that other jurisdictions had found the exact same language to be ambiguous and that the majority view recognized that the definition of collapse did not require that the building fall to the ground. On the other hand, Midwest argued that the policy’s plain language must be read to define the verb “collapse.” It contended that it was undisputed that the cracked joists did not lead to collapse because the ceiling never fell. It only sagged. Midwest also argued that the policy provision that excluded “cracking” applied to the cracked joists and precluded coverage.

The Supreme Court acknowledged that other jurisdictions found the exact same policy language to be ambiguous and basically agreed with them. It determined that insurance policies that use this same “collapse” provision can be interpreted in at least three ways. This meant that the term was ambiguous. It decided to follow the jurisdictions that defined collapse to include imminent collapse as well as actual collapse. Imminent collapse was defined as “likely to happen without delay; impending or threatening; and requires a showing of more than just substantial impairment.” It determined that this approach was the reasonable middle ground between the approach presented by Zoo Properties (“substantial impairment” requirement broadly permits recovery for damages that, “while substantial, do not threaten collapse”) and Midwestern’s narrower approach that permits recovery only from “actual collapse.”

As a result, it found the most reasonable construction of the term “collapse” was to define it to include “imminent collapse.” It found that adopting the first approach protected the insured without distorting the purpose of the clause to protect against damage from collapse. In addition, it stated that constructing the definition of “collapse” to include imminent collapse eliminated the incentive for policyholders to risk injury to others while waiting for actual collapse. It reversed the circuit court’s grant of summary judgment in favor of Midwest and remanded for proceedings consistent with this opinion.

Supreme Court 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. No. 25667. Considered on Briefs Jan. 10, 2011. Decided March 23, 2011. 797 N.W.2d 779