Whether an "all risk" policy covered a building severely damaged by hidden decay was the issue before the Second Circuit in Dalton v. Harleysville Worcester Mut. Ins. Co., No. 07-3545 (2nd Cir. Feb. 19, 2009). 

      During the policy period, damage to an interior wall between the insureds' building and the adjacent building was discovered.  The city inspector ordered the building be vacated.  An engineer hired by the insureds concluded the structural failure of the wall resulted from deteriorated mortar joints.  The deterioration that led to the collapse of the party wall was hidden from view. 

    The insurer denied coverage.  The policy excluded coverage for "decay, deterioration, . . . or any quality in the property that causes it to damage or destroy itself."  Elsewhere, the policy excluded coverage for collapse,"except as provided in the Additional Coverage for Collapse" provision.  This provision stated the insurer would pay for damage resulting from risks of direct physical loss involving collapse of a building caused by hidden decay.  Collapse, however, did not included bulging.

    The district court granted the insurer's motion for summary judgment and dismissed the suit.  It construed the insured's expert report as finding the damage consisted of "bulging," which was excluded.  Further, the district court found New York case law held that "collapse" coverage applied only to total or near total destruction.  The insured's building here was only structurally unsound.

   The Second Circuit reversed.  First, the insured's expert found the cause of the collapse was not "bulging," but hidden deterioration.  "Collapse" was covered if caused by "hidden decay."  Second, New York case law was unclear on whether coverage for "collapse" caused by "hidden decay" included a building whose structural integrity was impaired by deteriorated mortar joints that were hidden from view.  If New York law determined "collapse" to require a sudden destructive force, the policy did not require suddenness.  

    Therefore the policy was ambiguous and susceptible of two reasonable interpretations.  The policy did not resolve whether "total or near total destruction" was required and the New York case law did not supply a clear definition of "collapse" that might clarify the ambiguity.

    Thanks once again to my Damon Key colleague and fellow blogger, Robert Thomas, for sending me this case.  Robert's well-traveled blog is at inversecomdemnation.com.