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On June 18, 2015, the Washington State Supreme Court, in a policy that failed to include a definition of “collapse”, adopted the insured’s proposed definition to find coverage for hidden decay in some shear walls which according to one engineer substantially impaired the walls’ ability to resist lateral loads.

In Queen Anne Park Homeowner’s Association v. State Farm Fire & Cas. Co., 2015 Wash. LEXIS 695, an engineer hired by a condominium association detected hidden decay in some shear walls (plywood/gypsum sheathings), which he opined substantially impaired the walls’ ability to resist lateral loads.

The insurance policy covered “accidental direct physical loss” to the insured property, unless the loss was excluded or limited.  An Extension of Coverage covered “any accidental direct physical loss to covered property involving collapse of a building or any part of a building caused only by one or more of the following: … (2) hidden decay.”  The coverage extension also provided that “[c]ollapse does not include settling, cracking, shrinking, bulging or expansion.”  Neither the policy nor its extensions otherwise defined the term “collapse.”

The HOA filed a claim with State Farm claiming that its building had “collapsed” which it interpreted to mean a “substantial impairment of the structural integrity of any portion or component of the building.”  The HOA argued that its building had several areas of hidden decay and that it believed that these and other areas suffered a substantial impairment of structural integrity during [the] policy periods.  State Farm denied the claim and the HOA filed suit.

The Washington State Supreme Court, on a writ of certiorari from the Ninth Circuit Court of Appeals found that the undefined term “collapse” in the insurance policy was ambiguous because it is susceptible to more than one reasonable interpretation, citing several cases, both in Washington and in other states that defined the term in different ways.  The Court then stated that when an insurance policy is ambiguous, the meaning and construction most favorable to the insured must be applied, even though the insurer may have intended another meaning.  It then “largely agreed” with the HOA that “collapse” means “substantial impairment of structural integrity” which itself means that all or part of a building is unfit for its function or unsafe.  In this case, that meant more than mere settling, cracking, shrinkage, bulging or expansion.

The Court was careful not to adopt a fixed definition of collapse for all insurance policies, but this definition will certainly apply in affected policies which do not define the term.