Treble damage may be available when insurance companies act misleadingly and handle claims under North Carolina North Carolina’s Unfair and Deceptive Trade Practices Act, NC Gen. State. § 75.1-1. A recent decision meant an obvious “collapse loss” where the insurer searched for a theory that would not find any coverage. Losses to buildings are no joke. Serious damage to property and people is at stake. Facts about this collapse show how close to having fun can be a terrible event.
The Court of Appeal found the loss as follows:
DENC has owned The Crest, an apartment building in Elon, North Carolina, since 2013. It leased The Crest to Elon University for student housing. From November 2017 to November 2018, DENC insured the property with insurance from Philadelphia.
In January 2018, the students gathered on the second floor of The Crest for a party. In the early hours of that night, partygoers began to “jump in the air.” According to a witness, the wind road suddenly collapsed while the students were jumping. Two student reporters arrived in the morning. Both observed that the breezeway hung down more than a foot.1
When the judge read further in the minutes of the trial, the judge added:
Two student reporters watched the breezeway the morning after the party. In their testimony, each of what happened to the building was characterized as a “collapse.” They each observed that part of the wind had fallen to the ground, and the rest hung down at least one foot. They each saw a significant amount of debris on the ground below the second floor breezeway, and a large hole in the ceiling of the first floor breezeway. Philadelphia has not questioned these facts.2
Given the facts, the first question that comes to insurance coverage would be – did the insurance have collapse protection?
The Court of Appeal tried to describe the policy:
[T]the insurance contained a “collapse approval” which changed the scope of coverage for “collapse” in the main body of the insurance. The collapse approval consisted of two parts.
Section I of the Recommendation amended the policy exclusions and deleted and replaced the “collapse” subsection. Under section I, the policy excluded:
Collapse, including any of the following conditions for property or any part of the property:
(1) A sudden fall or fall;
(2) Loss of structural integrity, including separation of parts of the property or the property at risk of falling or collapsing; or
(3) All cracks, bulges, sagging, bends, slopes, settlements, shrinkage or expansion to which such condition relates to (1) or (2) above.
But this exclusion would not apply to collapse caused by ‘[w]eight persons or personal property “or to collapse covered by Section II.
Section II amended the insurance to explicitly cover “sudden collapse”, which it defined as “a sudden fall or burglary of a” building “or any part of a” building “with the result that” the building “or part of a” building ” can not be used for its intended purpose. ‘ Id. Nevertheless, Section II covered only “abrupt collapse” caused by:
a. ‘Building decay’ which is hidden from view, unless the occurrence of such decay is known to an insured before the collapse;
. . .
d. Use of defective materials or methods in the construction. . . if the abrupt collapse occurs after construction. . . is complete, but only if the collapse is partly caused by. . . [w]eight people or personal property.
And Section II stated that its coverage would not apply to:
a. A ‘building’ or any part of a ‘building’ which is in danger of collapsing or collapsing;
b. A part of a ‘building’ that stands, even if it has been separated from another part of the ‘building’; or
c. A “building” that stands or any part of a “building” that stands, even if it shows signs of cracking, bulging, hanging, bending, tilting, settling, shrinking or expanding.
Describing policy language for others can be tricky. So I laughed when the trial judge noted in two footnotes:
6 In the bulk of the insurance, it excludes coverage for ‘collapse’, except as set out below in
the additional cover for collapse. ‘ The provision “Additional coverage – Collapse” provides coverage for loss “caused by or due to risks of direct physical” loss “involving the collapse of” buildings “or any part of” buildings “caused only by” specific listed events, including collapse of “buildings” hidden decay and weight of people or personal property. Later in the policy, however, there is a recommendation labeled “Collapse – Exclusion and Additional Coverage Restored”, which removes both the original exclusion for collapse and the provision “Additional Coverage – Summary”, and replaces these provisions with other languages, as well as adding additional terms related to “collapse”.
7 To facilitate reading, the Court has not included ellipses to mark the erasure of irrelevant material, nor has the Court noted any changes in capital letters that are necessary in this context.
After the collapse incident occurred, the insurance company’s adjusters claimed that undetected “water damage” caused the loss. The Court of Appeal then recited the following steps by the insurer:
Philadelphia then sent two letters to DENC. The first was a letter with reservations about rights, which stated that it would continue to investigate DENC’s claims. The second letter (sent two days later) informed DENC that it had “issued or will issue payment”. . . for damages or damages incurred “according to DENC’s claim. The letter also stated that” it appears[ed] another party may have caused or contributed to the damages incurred. “Id. And although it was stated that Philadelphia would claim compensation from the” responsible party “, the letter did not specify who that party was.
At this point, it seemed that Philadelphia would pay for the loss. But as is so often the case now, an engineer was sent by the insurance company who found a theory where coverage could be denied:
Philadelphia hired a construction engineer to assess the wind route. He concluded that “long-term water intrusion  ultimately resulted in the wooden frame (construction) element not being able to carry dead (slab) and living (living) loads. ‘ He suggested that the original building contractor failed to “install a water supply system on the walls correctly” or a “properly integrated waterproof system”. These failures, the engineer said, resulted in “prolonged repeated moisture exposure” to the Breezeway wood frame.
After reviewing the engineer’s report, Philadelphia sent a third letter to DENC. This time, Philadelphia said they would deny coverage.
The district court ruled that the “collapse” was covered, and the appellate court confirmed. That discussion is worth a separate blog and a presentation on the risk of “collapse”. However, the Court of Appeal focused on the inappropriate and strained reasoning for the denial:
As the district court aptly put it, Philadelphia’s “framing ignores Collapse Endorsement’s focus on whether the event was a collapse.” The engineers’ testimonies explain what (in their opinion) caused the collapse. But it bypasses the relevant question of whether breezeway suddenly collapsed. At that point, Philadelphia is quiet – for good reason. The indisputable evidence shows that Breezeway suddenly fell by at least one foot. Without any definition of “abrupt collapse” in the policy that excludes these circumstances, we believe that the requirement is met.
Think of the facts that lead to Philadelphia’s denial of coverage. Shortly after the breezeway collapse, the Philadelphia DENC announced that it would investigate the claim under a reservation of rights. Two days later, Philadelphia stated that they had “issued, or [would] issue payment to DENC. YES 530. Just a few weeks later, Philadelphia denied DENC’s claim in a letter that did not refer to its previous payment agreement.
And as the district court ruled, ‘[n]something in the denial letter links “the basis of the insurance policy” for the denial “to facts” required by § 58-63-15 (11) (n). ” denied coverage because DENC’s damage was the result of prolonged water intrusion and deteriorating wooden frame.
But none of the policies Philadelphia listed in the denial letter used the phrase “water intrusion.” Nor did the letter explain which of the many enumerated provisions blocked the coverage. This is particularly worrying because “some of the provisions set out in the letter were not even part of the policy; several had been removed and replaced by policy changes or recommendations. [didn’t] applied to the current collapse of Breezeway, such as those referring to flood or steam boilers. ‘ Philadelphia even included “wrong provision governing collapse.” The authors of the rejection letter admitted these errors.
The district court was right to find that Philadelphia did not offer a “reasonable explanation” for refusing coverage, as required by § 58-63-15 (11) (n). Although the letter stated that no “covered collapse began” during the coverage period, it did not explain (much less reasonably) why the insurance’s operational Collapse Endorsement did not cover the loss. Instead, it left DENC to decipher a morass of largely inappropriate policy language without any clear link to Philadelphia’s fact-finding.
In our view, Philadelphia will not further explain the interplay between these facts and the policy by repeating the facts. And § 58-63-15 (11) (n) requires insurers to do more than list all potentially applicable insurance terms alongside facts. In fact, an insurer must reasonably explain the “basis of the denial in the insurance in relation to the facts.” NC Gen. State. § 58-63-15 (11) (n) (min italics); Relation, WEBSTER’S THIRD NEW INT’L DICTIONARY (1976) (‘Reference, Respect’).
… But Philadelphia had a duty to reasonably explain that connection in the first place. Instead, it tried to hide the ball by demanding that DENC sift through many other unexplained (and irrelevant) policy provisions, which were not the basis for the denial. After flooding the DENC with admittedly inappropriate policy terms, Philadelphia failed to identify what exclusion was going on. Allowing that confusion requires too much of the insured and too little of the insurer.
This is a case worth reading in its entirety. The case has an instructive discussion about collapse loss and relevant language use that is found in many policies. There is also a big discussion about extra expense coverage when tenants are forced to temporarily move out of the premises. Finally, if you work in North Carolina, it is important to note how misleading methods of rejecting a claim can lead to triple damages.
Shaking hands with the Queen of England was far from being forced to sit in the colored part of the bus that went into central Wilmington, North Carolina.
– Althea Gibson
1 DENC, LLC v. Philadelphia Indem. Ins. Co.No. 20-1640 (4th ed. April 18, 2022).
2 DENC, LLC v. Philadelphia Indem. Ins. Co.No. 1: 18-cv-754 (MDNC October 15, 2019).