California Appellate Court Finds Unambiguous Language to be Against Public Policy

July 1, 2002

By: Kenneth Goates

This June, the California Second Appellate District Court (Los Angeles area) ruled that public policy might override clear and "unambiguous" language of a policy. The issue in question was a property policy and the language being interpreted involved its limitations on the collapse hazard. Although this opinion is provided in a property context, the court's decision has potentially far-reaching implications for how other limiting language in insurance policies might be treated as they come under judicial review (for example, manuscript endorsements in general liability policies addressing continuous property damage losses, mold and other emerging issues).

In Rosen v. State Farm General Insurance Co. 2002 DJDAR 6151 (June 5, 2002), the court addresses the collapse hazard. In this case, Mr. Rosen had two decks attached to his house. A contractor advised him that the decks had severely deteriorated and he believed that the decks were in a state of "imminent collapse." Mr. Rosen sought coverage under his first party property policy for the repairs to the decks to prevent their collapse.

His State Farm policy provided coverage for collapse as an "additional coverage." The policy defined collapse as "actually fallen down or fallen into pieces." The definition specifically excluded "settling, cracking, shrinking, bulging, expansion, sagging or bowing" as constituting "collapse".

The Appellate court found that the State Farm policy language was "unambiguous" and "under no stretch of the imagination does actually mean imminently." As such, the court distinguished the holding in Doheny West Homeowner's Association v. American Guarantee (1997) 60 Cal. App. 4th 400 where the court held that a different definition of "collapse" was ambiguous and therefore extended coverage to situations of "imminent collapse."

Rather, the court in Rosen held that despite the unambiguous language in the State Farm policy, public policy mandated coverage for imminent collapse. The court found that the actual collapse of a building could result in serious injury or loss of human life in addition to substantial property damage. The court found that waiting for an actual collapse before triggering of the coverage is "troubling" and encourages property owners to risk serious injury or death or greater property damage to insure that coverage would attach.

This rationale used by the court to hold that clear and unambiguous policy provisions are unenforceable due to health and safety concerns may impact other coverage issues.

Might the court use that same reasoning to require an insurer to remedy mold in a building before any actual damage to property? Could a court find coverage for costs to correct building code violations that relate to "health and safety" issues where there has been no actual property damage? There are obviously many variations on this theme and different factual scenarios that can be considered. Most interesting, however, is the court's determination of what is in the public interest. Although not in a judicial context, this is similar to California's Insurance Commissioner announcing that California will not allow use of the proposed ISO terrorism exclusion. This approach is not new, but it is one that the industry and practitioners can expect to see become more prevalent as insureds contest the application of policy limitations.