A Square Peg in a Round Hole: Court Rules Decay is Not the Same as Defect

In Bardis v. Stinson, 2016 WL 1650509 (N.J. April 27, 2016), the New Jersey Supreme Court addressed the issue of whether the collapse of the insureds’ basement wall was covered under their homeowner’s insurance policy.   Adopting the reasoning of the dissenting judge in the court below, the Court held that there was no coverage.  The Court did not write its own opinion.

The facts of the case are not complex.  In December 2009, one of the basement walls in the insureds’ single-family home collapsed.  The basement was part of an addition to the original home that had been added twenty years earlier.  The policy at issue provided limited coverage for collapse losses.  Specifically, the policy provided coverage for “the collapse of a building or any structural part of a building that ensues” caused by “[h]idden decay, unless such decay is known to an insured prior to the collapse.

The insureds’ expert concluded that “the cause of the collapse was a lateral bending failure due to excessive horizontal loads” resulting from the improper construction of the basement wall.  The insureds essentially argued that “hidden decay” included “hidden construction defects.”   According to the insureds, because the loss was caused by “hidden decay,” it fell within the limited collapse coverage of the policy.

Both parties moved for summary judgement in the trial court.  The trial judge granted summary judgment to the insurer, concluding that the insured failed to establish that the loss was caused by hidden decay.  Interestingly, the insureds also moved to strike the expert report prepared by the insurer’s expert, arguing that it constituted a net opinion.  Prior to addressing the dueling summary judgment motions, the court granted the insureds’ motion to strike.  In granting summary judgment to the insurer, the trial judge noted that the sole support for the insureds’ hidden decay argument was the insurer’s expert’s report.  Because that report had been stricken, the insureds had no support for their hidden decay argument.

On appeal, the Appellate Division reversed.  Bardis v. Stinson, 444 N.J. Super. 227 (App. Div. Oct. 8, 2014).  Relying to a large extent on the reasonable expectations doctrine, the Appellate Division concluded that the insureds “could have reasonably expected that their homeowner’s insurance policy would cover a gradual decline in strength of their basement wall, followed by its sudden collapse, after it stood for over twenty years.”  Id. at 236.  The court went on to note:

While plaintiffs’ theory and interpretation of the term “hidden decay” may not fall squarely within the covered collapses of a building, it also does not fall within any exclusion or exceptions to a peril insured against. Thus, if the collapse was due to poor or defective construction methods used to construct the basement foundation wall system combined with the factor of twenty years of hydrostatic pressure and excessive loads upon the improperly supported foundation walls, then plaintiffs may be covered.

Id. at 237-38.  Thus, the court concluded that “[a] genuine issue of material fact is presented as to the cause of the collapse and the application of the insurance policy.”  Id. at 239.

One judge dissented from the decision.  He was of the view that the policy was clear and unambiguous and did not provide coverage for the loss.  He agreed with the trial court that “the plain meaning of the term ‘decay’ is not the same as the plain meaning of the term ‘defect’.”  Id. at 240 (Sapp-Peterson, P.J.A.D., dissenting).  According to Judge Sapp-Peterson:

A “defect” connotes imperfection from the outset, while “decay” connotes a decline from a condition that was originally sound.  One cannot force a square peg into a round hole.

Id. at 241.

As noted, the New Jersey Supreme Court did not write its own opinion.  The Court simply reversed the decision of the Appellate Division “substantially for the reasons expressed in Judge Sapp–Peterson’s dissenting opinion.” 2016 WL 1650509.

The Appellate Division’s decision is a prime example of a court straining to find coverage where none otherwise exists.  As observed by the dissenting judge, the court “force[d] a square peg into a round hole” by equating “decay” with “defect.”  As courts often do in such instances, the Appellate Division misapplied the reasonable expectations doctrine in reaching its conclusion.  Absent significant public policy concerns, that doctrine has no application where the language of an insurance policy is clear and unambiguous.  No such public policy concerns existed in the Bardis case and, therefore, the doctrine should not have been applied.


© William D. Wilson and NJInsuranceBlog.com, 2015.  Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.  Excerpts and links may be used, provided that full and clear credit is given to William D. Wilson or NJInsuranceBlog.com with appropriate and specific direction to the original content.

By William D Wilson

I am a partner in Mound, Cotton, Wollan & Greengrass, which is headquartered in New York City. I am in charge of running the firm's New Jersey office, which is in Florham Park. I have been practicing law for approximately 23 years and focus primarily on insurance related matters