What Does Collapse Mean in Your Policy?

Definitions Matter

Property insurance policies can include the term collapse as both an insured peril and as an exclusion. The definition of collapse in insurance policies varies, and accordingly, an insurer may deny coverage. When a policy defines collapse, that definition controls. If the term is left undefined, the meaning is derived from the context in which it is used in the policy. Depending on the context, courts may require a great deal of damage before collapse coverage will be triggered.

Recently, in Tustin Field Gas Food, Inc. v. Mid-Century Ins. Co., (2017) 17 C.D.O.S, the California Court of Appeal ruled that the impairment of an underground storage tank’s structural integrity was not a covered “collapse” under the policy as a matter of law.

In Tustin, a storage tank was improperly installed causing the external shell of the tank to split open, while the internal lining remained intact. The insured submitted a claim but was denied coverage. The policy generally excluded losses caused by collapse, but it provided for “Additional Coverage for Collapse” to losses caused by defective methods used during construction; this subsection only specified that collapse did not include settling, shrinkage, bulging or expansion. In the ensuing suit, the insured argued that because the tank was not usable until it was repaired under state law, it constituted a collapse. Even though collapse was not defined in the policy, the trial court declined to adopt the insured’s construction of the term and the insured was denied coverage. The Court of Appeal reaffirmed its judgment.

First, the Court rejected the insured’s argument that if a structure (tank) is not usable, it has collapsed.

Second, the Court rejected the argument that because collapse is undefined, it is ambiguous and should be construed in favor of the insured. The Court reasoned that the insurance policy expressly provided that collapse does not include settling, cracking, shrinkage, bulging or expansion, and thus the context in which the term was used clearly required a showing of something more to constitute a collapse.

Third, the Court rejected the argument that California law defines collapse as a “substantial impairment of structural integrity,” at least where a policy excludes “settling” and the like. When a policy excludes from coverage “settling,” “cracking,” “shrinkage,” or “expansion,” the policy will not cover a collapse based solely on a “substantial impairment of structural integrity.” Because the policy excluded “settling” and the like, such impairment did not constitute a “collapse” as a matter of law.