Imminent Collapse Covered Under Hidden Decay Provision

Commercial Property	Water Intrusion
EFIS	Term Definition

Wall & Associates LLC (Wall) constructed two buildings in 1989 and 1990. Both structures featured exteriors made of a polystyrene foam wall system known as the "External Insulation Finishing System" (EIFS). At the time of construction, EIFS was a relatively new building technique.

Soon after their construction, the buildings developed water leaks. Multiple measures, including re-caulking and special paint application, were undertaken over several years to address the issues. Wall retained experts to assess the problems. Extensive testing revealed water intrusion had caused decay and deterioration, and the EIFS was at immediate risk of detachment, creating a public hazard. The recommendation was to remove and replace the EIFS on two sides of the buildings. Experts also noted that it was impossible to determine when, or if, the EIFS would fail. However, once repairs commenced, some brick facades detached with minimal touch.

The insurance policy covering these buildings was issued by Assurance Company of America (Assurance) and became effective on March 25, 1999. Wall reported a loss in June 1999. Several months after repairs were completed, Wall submitted a proof of loss requesting approximately $530,000. The claim forms indicated that the damage was first identified on April 22, 1999, and coverage was claimed for a collapse. The damage was described as "deterioration of gypsum wallboard forming substrate of exterior wall system, creating high risk of failure of structural support for brick facing."

Assurance's policy covered "risks of direct physical loss or damage," but it also excluded loss caused by collapse. The exclusion made an exception, covering ensuing loss caused by certain specified perils and by hidden decay.

Assurance denied Wall's claim, asserting there was no collapse. Following this, Assurance filed a declaratory judgment action to clarify several issues. Both parties submitted motions for summary judgment, and the trial court granted Assurance's motion, holding that no "collapse" took place. It also concluded that without a collapse, the other issues became moot. Wall appealed.

The appellate court examined several related cases and noted that the policy did not define 'collapse.' It clarified that 'collapse' should encompass imminent collapse, indicating that requiring an actual collapse to trigger coverage when one is only imminent would violate public policy.

The court suggested that an exception to the collapse exclusion should include "imminent" collapse and interpreted "collapse" to mean "substantial impairment of structural integrity.' It also expanded "risk" of loss to include "threat" of loss. The court concluded that the trial court made an error by interpreting "collapse" in isolation without considering other relevant terms. It remanded the case back to the trial court to reevaluate the facts based on this broader interpretation.

Assurance Company Of America, A Maryland Corporation, Plaintiff-Appellee V. Wall & Associates LLC Of Olympia, a Washington corporation, Defendant-Appellant. U.S. Court of Appeals, Ninth Circuit. No. 02-35992. August 5, 2004. Reversed and remanded. 2004 CCH Personal and Commercial Liability Cases. Paragraph 48,015.