Free Order - District Court of Arizona - Arizona

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA VILLAGE SQUARE AT WESTBROOK VILLAGE, an Arizona corporation Plaintiff, vs. STATE FARM FIRE AND CASUALTY COMPANY; ABC CORPORATIONS I-X; JOHN DOES I-X, Defendants. Pursuant to Rule 27, Arizona Rules of the Supreme Court, the United States District Court for the District of Arizona, H. Russel Holland, hereby certifies a question to the Arizona Supreme Court with regard to the interpretation and construction of the term "collapse" as used in the relevant insurance policy issued by defendant State Farm Fire and Casualty Company. The following are the particulars of this certification order. A. Questions of law to be answered. 1. There is a split of authority among the courts from around the country, which have CV03-2515-PHX-HRH ORDER CERTIFYING QUESTION OF LAW CONCERNING INTERPRETATION OF TERM "COLLAPSE"

interpreted the term "collapse". There appear to be three different lines of authority as to when coverage applies including: (1) substantial impairment of structural integrity, (2) imminent danger of collapse, and (3) a sudden and entire failure of the supporting elements of a structure. The question the parties certify is with which line of cases does Arizona align itself? 2. 3. How is the term "collapse" to be construed, as used in the insurance policy? Whether there has been a "collapse", as that term is used in the insurance policy,

where there has been no sudden and entire failure of the insured structure?

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4.

Whether there has been a "collapse", as that term is used in the insurance policy,

where no sudden and entire failure has occurred but the structure is in imminent danger of sudden and entire failure from its existing condition? 5. Whether there has been a "collapse", as that term is used in the insurance policy,

where the insured demonstrates the existence of a substantial impairment of the insured property's structural integrity? B. All facts relevant to the questions certified 1. The policy in question provides in relevant part [Form FP-6109 (5/89)]:

LOSSES INSURED We insure for accidental direct physical loss to property covered under this policy unless the loss is: limited in the PROPERTY SUBJECT TO LIMITATIONS section; or excluded in the LOSSES NOT INSURED section that follows. LOSSES NOT INSURED 2. We do not insure for loss either consisting of, or directly and immediately caused by, one or more of the following: p. collapse, except as provided in the Extensions of Coverage.

But if accidental direct physical loss by an insured loss results at the described premises we will pay for that resulting loss. SECTION I EXTENSIONS OF COVERAGE EXTENSIONS OF COVERAGE Subject to the terms and conditions applicable to Section I of this policy, the following Extensions of Coverage apply separately to each location scheduled in the Declarations. But the amount of insurance afforded on any one scheduled location will not be more than the limit of insurance specified in each Extension of Coverage if a limit is included in the extension. 4. Collapse. a. We will pay for 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:

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(1) any of the "Specified Causes of Loss" or breakage of building glass, only as insured against in this policy; (2) (3) (4) (5) hidden decay; hidden insect or vermin damage; weight of people or personal property; weight of rain that collects on a roof;

(6) use of defective material or methods if construction, remodeling or renovation if the collapse occurs during the course of the construction, remodeling or renovation. b. We will not pay for loss to the following types of property caused by items a.(2), (3), (4), (5) and (6) above unless the loss is a direct result of the collapse of a building: (1) (2) (3) (4) c. 2. 3. awnings, gutters and downspouts; yard fixtures, fences, outdoor swimming pools, piers, wharves and docks; beach or diving platforms or appurtenances; retaining walls, walks, roadways and other paved surfaces.

Collapse does not include settling, cracking, shrinking, bulging or expansion.

The policy does not contain a specific definition of the term "collapse." This matter arises out of an insurance claim that was brought by Westbrook against defendant

State Farm in which Westbrook alleged that State Farm was obligated to indemnify Westbrook for the costs of repairing balconies on the north and east sides of building No. 3 and the west side of building No. 4 located at the property insured under the State Farm policy. 4. 5. The balconies in question were originally constructed by UDC in 1987. In 1989, Mr. Fred Sughrue, a resident at the Village Square at Westbrook Village, began

noticing that his balcony on the north side of building No. 4 began separating from its supporting columns and later also separated from the exterior wall of his condominium unit. 6. UDC performed only cosmetic repairs to the balconies and between 1991 and 2000, there

was no additional work performed on the balconies until State Farm determined that certain balconies were in imminent danger of collapse. Given that information, and because of the uncertainty of the authority the -3-

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Arizona courts would follow, State Farm agreed to pay for repairs to the balconies on the north side of building No. 4. 7. State Farm denied coverage for other balconies, which in the opinion of State Farm did not

appear to be covered by its policy. C. Plaintiff 1. This matter arises out of an insurance claim that was brought by Westbrook against defendant Other facts deemed material by the parties

State Farm in which Westbrook claimed that State Farm was obligated to indemnify Westbrook for the costs of repairing balconies on buildings located at the property insured under the State Farm policy. (See Complaint herein) 2. This claim involves two condominium buildings located at the condominium complex

represented by plaintiff. (See Complaint) 3. The buildings have been examined and they have been given designations by State Farm's

engineer, Jonathan Higgins. These designations are used throughout discovery in this case. The buildings in question in this lawsuit are designated buildings 3 and 4. (Deposition of Higgins, Exhibit 1, pp. 17-18; see also, Exhibit 2, diagram prepared by Mr. Higgins) 4. The subject matter of this case consists of the balconies which are attached as a feature to

the exterior of the condominium buildings. 5. In 1989, Fred Sughrue, a resident of building 4 (top floor) noticed that the banister

surrounding his balcony was beginning to pull away from the column to which it was attached. He did not report this at first because it did not seem to be a significant problem. 6. Mr. Sughrue reported this to UDC, the home builder, and in response, UDC sent someone

out to caulk the crack where the separation between the banister and the support column was located. 7. The overall condition of the balcony gradually got worse and Mr. Sughrue reported the

problem to the homeowner's association board.

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8.

Over time, a crack developed between the floor of the balcony and the exterior of the wall

of the condominium building to which it attached at the Sughrue residence. 9. Eventually Mr. Sughrue's balcony became deflected to such a point that he could not use the

balcony. Mr. Sughrue recalls that yellow tape was put out to barricade the use of the balcony. 10. The worst separation of the Sughrue balcony occurred where the balcony joined to the

support column. 11. Mr. Sughrue stated that if you were on the ground and looked up at his balcony it looked like

the floor was sinking. 12. Mr. Sughrue described some separations between the floor of the balcony and the supporting

columns to have grown to a dimension of four to six inches. 13. In 2001 a homeowner's association meeting addressed the subject of the problems with the

balconies and it was determined that action should be taken. It was resolved to retain engineers and investigate the problem. 14. The homeowner's association retained Starling & Associates, an engineering firm, to

examine the nature and extent of the balcony problem and to examine the cause of the apparent failure. 15. 16. Westbrook made a claim to State Farm for the problems with the balconies in 2002. Mr. Tharp, who lives at Westbrook Village, and who has been a board member of the

Westbrook Village homeowner's association off and on since 2002 testified that although the balconies have not actually fallen down to the ground they do appear to be in the process of falling down. 17. Westbrook made a claim to State Farm for the balconies on the north side of building 4

(which included the Sughrue balcony). The State Farm claim manager, Charles Poole, admitted that State Farm initially refused to pay for the failing balconies on building 4, north side, but later relented after receiving the Starling report and agreed to pay for those balconies. 18. The Claim Committee who reviewed the facts of the loss surrounding the north end of

building 4 agreed that there was coverage. For that reason, State Farm paid for that claim.

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19.

Mr. Poole personally looked at Mr. Sughrue's balcony and agreed that the balcony was in

imminent danger of collapse. 20. Mr. Poole described Sughrue's balcony as pulling away from the wall and he saw an extreme

degree of rot and deterioration of the beams that had been exposed by the tearing out of the stucco. 21. Mr. Poole also remembers the floor of the Sughure balcony having a slant away from the

building. If you dropped a ball on it it may roll off the balcony away from the building. 22. State Farm agreed to pay the first claim involving the north end of building 4 but refused to

pay for any other balconies. 23. 24. Charles Poole agreed that Mr. Starling was a reliable engineer. In his reports and in his deposition testimony Mr. Starling verified that in his opinion the

cause of the collapse or failure of the balconies was hidden decay caused by moisture. 25. According to Mr. Starling, all of the balconies that he observed on buildings 3 and 4 suffered

from the same fundamental problem. They all appeared to have distress in the same locations and the same nature of distress. There were simply different stages of progression of the distress caused by the rotting.

26.

Mr. Starling personally performed some testing on building 3. He cut holes in the stucco to

observe the wooden supports in the balconies of all four buildings at the condominium site. On building 3 they saw examples where the timber had been crushed. In some cases it had an appearance "almost like paper-mache." He described it as "just rotten lumber." 27. Mr. Starling further described his conclusions as to the cause of failure. He described it as

a "progressive failure of the water proofing system." 28. Mr. Starling also confirmed that if the stucco had not been removed to expose the wood rot,

it would not have been visible from the exterior of the structure.

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29.

A review of the State Farm claim file and the testimony of the State Farm adjusters reveal

that they agreed that this group of balconies came within the "collapse" coverage of the applicable policy.

30. Farm. 31.

Jonathan Higgins of Rimkus Engineering examined the balconies at the request of State

In each of the reports, Mr. Higgins was asked to address the question whether the balconies

were in imminent danger of collapse. Mr. Higgins confirmed that the balconies on buildings 3 and 4 were all in imminent danger of collapse. 32. The State Farm policy creates coverage for damages caused by "collapse" as follows: "We will pay for any accidental direct physical loss to covered property involving collapse of a building or any part of a building or any part of a building caused only by one or more of the following... (2) hidden decay..." 33. State Farm has produced their Operations Guidelines in this matter relating to the definition

of the word "collapse." "5. Collapse.

a. The determination of what constitutes `collapse' varies greatly by jurisdiction. It is necessary for you to be familiar with local case law which interprets the peril of collapse. You need to determine how collapse is interpreted in your jurisdiction." 34. 35. The term collapse is not defined in the present policy. State Farm conducted a claim committee meeting with regard to the claim in question. The

Claim Committee Memorandum in considering the claim for the north side balconies of building 4 concluded that there was coverage for the claim. The Claim Committee Notes reflect State Farm's agreement that the balconies in question satisfied the criteria so as to constitute a "collapse." The Claim Committee Notes state: "However, as the Doheny case and others noted, eminent [sic] danger is more than a structure collapsing some time in the future due to decay or some other problem. Eminent danger would suggest `likely to happen without delay; impending, threatening, or likely to occur at any moment.' A structural engineer report states the balconies are structurally failing and the three in -7-

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question are in eminent danger of collapse. As such, the balconies have been shored up. Other balconies have some sagging and cracking of stucco at the corners but do not appear to be in eminent danger of collapse. Thus, I believe coverage should only extend to the present three balconies pending further inspections by our engineer." 36. The same Claim Committee note reflects State Farm's agreement that the cause of the

collapse appears to be "water infiltration due to poor and/or improper construction." 37. Keith Bol, licensed contractor with a specialty in restoration work has performed the repair

work on the buildings at Westbrook. 38. 39. Mr. Bol is an experienced restoration contractor. In his opinion, all of the balconies that he repaired on buildings 3 and 4 were in need of repair

and the repair was necessitated due to hidden decay and wood rot. Numerous balconies which he reviewed were in a state of partial collapse. The degrees varied. Defendants 1. At all times relevant hereto, the Plaintiff was insured through a policy of insurance

purchased from State Farm, policy No. 93-04-5440-5. (See Plaintiff's Complaint, at para. 3). 2. The Plaintiff has alleged that on October 24, 2001 it was discovered that balconies on

Plaintiff's condominiums had started to separate from the exterior walls of the condominiums and that the balconies were beginning to collapse. 3. Plaintiff made a claim with State Farm for the damage to the balconies on the west side

of Building No. 4, as well as those on the north and east sides of Building 3. 4. 5. 6. The balconies in question were originally constructed by UDC in 1987 Residents at Village Square began noticing problems with the balconies in 1989. The problems with the balconies were reported to UDC in May or June of 1989. UDC

came out and performed cosmetic repairs to the balconies. 7. Between 1991 and 2000, there were no actions taken to correct the problems with the

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8.

In 2000, the problems with the balconies were brought to the attention of the home owners'

association. Thereafter, the board retained an engineer to investigate the cause of the problems with the balconies. 9. balconies. 10. Thereafter, Rimkus performed a structural evaluation on the balconies. Rimkus reported State Farm retained Rimkus Consulting to investigate the cause of the deflection of the

its findings in a report dated January 28, 2003. Jonathan Higgins of Rimkus concluded that "all balcony columns...have structural defects attributable to the construction of the residence." 11. Mr. Higgins determined that the balconies were not in danger of collapse by ordinary use

but could collapse if certain seismic loads (earthquakes) or high-sustained winds occurred. Mr. Higgins has testified that the phrase "imminent danger of collapse" is not an engineering term. 12. Mr. Higgins testified that the balconies would not collapse under their own weight or from

residents standing on them, but rather, they were in imminent danger of collapse because they could not sustain withstand earthquakes or sustained winds in excess of seventy miles per hour. Mr. Higgins concluded that the wood rot contributed to the collapse of the balconies in merely a secondary fashion, and the cause of all the problems was faulty construction in the erection of the buildings. State Farm paid the claims for the balconies, which were in danger from their own weight and usage by persons, because it did not know what law applied in Arizona. D. A list of the counsel appearing in the matter.

Joseph C. Dolan, Esq. for plaintiffs Village Square at Westbrook Village Ralph E. Hunsaker, Esq. and Aaron Finter, Esq. for defendant State Farm Fire & Casualty Co. E. The proportions in which the parties shall share the required filing fees.

Parties have agreed to split them equally.

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F.

Any other matters that the certifying Court deems relevant to determination of the

questions certified. None.

DATED at Anchorage, Alaska, this 7th

day of September , 2005.

/s/ Honorable H. Russel Holland United States District Court

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