Champlain Towers South and insurance: uncovered dangers may become uncovered losses

Three days after the tragic collapse of half of the 136-unit Champlain Towers South condominium in Surfside, Florida, the association’s insurer, James River Insurance Company, announced that it was paying the entire amount of its policy into court.

In matters of insurance, always read the fine print, even in news stories.  James River is paying not the amount of its coverage for building insurance, but its coverage for general liability – the coverage that we associate with visitors who slip on wet or damaged walkways.  That policy amount is reported to be $5 million, which equates to about $30,000 per condominium unit.  The association carried insurance of various sorts reported to total $48 million, which is about $300,000 per unit, and is about half the total market value of the 136 units before the collapse.

The legal dispute between Sandalwood’s insurers (there are several) and the association is likely to focus on whether the policies cover the loss of the building.  That depends on the words in the policy.  Not every loss is a covered loss.

The Champlain Towers South case won’t be the first time Florida has seen this question.  In The Sandalwood Condominium Association at Wildwood, Inc. v. Allstate Insurance Company, 294 F.Supp. 2d 1315 (2003), the condominium’s policy covered “risk of direct physical loss involving collapse of a covered building or any part of a covered building caused only by one or more of the following,” including “hidden decay” and “hidden insect or vermin damage.”  In November 1998 the association discovered that termites had damaged several of the buildings.  As the association repaired the damage, it learned that the termite damage was extensive, and it filed a claim with Allstate in April 2000.  Seventeen months later Allstate denied the claim on two grounds: first, that the damage was not “collapse,” and second, that the damage was not “hidden.”   Allstate moved for summary judgment on both defenses.

The court denied both parts of Allstate’s motion.  Its explanation for rejecting Allstate’s argument that the damage was not “hidden” was not really a win for the association.  Why not?

Allstate alleged that, in the court’s words, the association “cannot claim the damage was hidden if they had prior knowledge of its existence,” and asked the court to rule that the Sandalwood association had to show that it did not know, and did not have a reason to know, that termites and decay had damaged the buildings.

The court rejected Allstate’s motion, but it adopted Allstate’s rule, saying that “in order to recover under the policy, Sandalwood must demonstrate that the damage to the structural integrity of the Complex was not visible and that Sandalwood neither knew nor should have known of the structural damage with sufficient time to allow for repairs before it reached the state of ‘collapse.'”  Because that was a question of fact and not a question of law, the court denied the motion.

Three years ago an engineering firm evaluated Champlain South. Buried in its report on page 7 is the following:  “The waterproofing below the Pool Deck & Entrance Drive as well as all of the planter waterproofing is beyond its useful life and therefore must all be completely removed and replaced.  The failed waterproofing is causing major structural damage to the concrete structural slab below these areas.  Failure to replace the waterproofing in the near future will cause the extent of the concrete deterioration to expand exponentially.”

If Champlain South’s policy reads like Sandalwood’s policy from Allstate did, be prepared for Champlain South’s insurer to argue that it doesn’t have to pay for the lost building because the association – its insured – knew about the severe damage in 2018 and had enough time to arrange for repairs, but didn’t.