1

07 - 35 45 - cv D a lto n v . H a r le y sv ill e 1 UN ITED STA TES C OU RT OF AP P EA LS 2 F OR THE SE CO ND CI RC UI T

3 August Term, 2008 4 (Argued: October 15, 2008 Dec ided: Fe bruar y 19, 2009)

5 Docke t No. 07-3545-c v
6 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -X 7 I RMA DAL TON, B LANCHE DAL TON, doingbusiness as SI DNEY 39 L TD., 8 Pla int if

fs -A pp e lla nts , 9 v

. 1 0 H A RLE Y S V ILLE W O R C E S T E R M U T U A L IN S U RA

N C E C O M P A

N Y , H A RLE Y S V ILLE 11 GR OU P, 12 De fe nd ants -A pp e lle e s. 13 14 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X 15 16 17 18 Be fore : L EVAL , KATZ MANN, a nd L IVI NGSTON, Circuit Judges

. 19 Plaintiffs, insured under a n all-risk policy covering a building, appea l from grant of summar y 20 judgme nt in favor of the defe ndant insurer by the United States District Court for the Ea stern District 21 of Ne w York ( Irizarry , J. ). Although New Y ork cour t rulings we re in c onflict, th e d i s t rict cour t 22 inferr ed fr om the silence o f t h e Ne w York Court of A ppeals that unde r Ne w York la w insuranc e 23 a g a ins t “ c oll a

ps e ” is tri g g e re d o nly

by “ tot a l or ne ar t ota l de str uc tio n, ” and

no t by a bu ild ing ’s los s 24 of structura l integrity resultingfrom hidd en d ec ay . Be cause the insurer wrote a policy using 25 ambiguous terms whose mea ning is not c l ar i fi ed by

New Y ork dec isions, the policy must be rea d 26 under N ew Yor

k law in favor of the insured. The Court of Appea ls (L eval, J. ) vac ates the judgment 27 and

re mand s.2 1 PAT RI CIA A . RO ON E Y , S i nnr e i c h & Ko sako ff L L P, 2 Central I slip, New York, f or Ap pe lla nts . 3 H EN RYJ. CE RN I T Z , Ja c o b s o n& Sc hw artz , 4 Rockville Centre, Ne w York, f or Appellee

s . 5 L EVAL , Circuit Judge : 6 This is an appe al b y t h e i nsured plaintiffs f rom the judg ment of the United States District 7 Court for the Easter n District of Ne w York ( Irizarry , J. ) grantingthe def endant insure r’s motion for 8 summa

ry jud g me nt dis mis sin gthe su it. Pla int if fs -A pp e lla nts Irm a and B lanc he Da lto n ( c oll e c tiv e ly 9 “the Da ltons”), as proprietors of a building at 39 Sidney Place, Brookly n, N.Y., we re insure d under 10 a so-c alled “a ll risk” policy issued by

the def endant Ha

rley sville W orce ster Mutual Insuranc e 11 Com

pa ny , whic h c ov e re d “ c oll a

ps e ” c a us e d by “ [h]id de n d e c ay .” Th e bu ild ingwa s f ound to b e so 12 sever ely damag ed by hidden dec ay

that the New

York City

Depa rtment of B uildings issued a notice 13 to vacate bec ause of the building’ s structura l instability . The Daltons claimed for t he damag e. W hen 14 Har ley sville disclaimed cover ag e, the Da ltons brought this suit. 15 B oth

sid e s mo ve d f

or summa ry jud g me nt. Th e dis tr ic t c ourt gra nte d s umm ary

jud g me nt i n 16 favor

of Ha rley sville, holding that t h e d amage to the Daltons’ building c ame within the policy ’s 17 express exclusion of “bulging ,” and in any event did not come within the concept of “collapse ” under 1 8 N e wY o r

k la w , wh ic hth e c o urt c o n c lu d e d is trig g e r e d

o n ly b y “ to ta l o r

n e ar to ta l d e s tr

u c ti o n . ” We 19 believe the district court misrea d the evidenc e in re lation to the terms o f t h e p o l i cy , and dre w 20 inappropriate s ignif icanc e from the refusal of the New York Court of Appeals to revie w lower court 21 prec edent. The judgme nt is vacate d and the c ase r emande d. 223 1 BACK GR OUND 2 The followingfac ts are undisputed. The Daltons own a thre e-story townhouse located at 3 39 Sid

ne y Pla c e , B ro ok ly

n, Ne w Y or

k, up on wh ic h in Ma y 20 03 Ha rl e y sv ill e iss ue d a

n a ll- ri sk 4 insurance policy . On Februar y 25, 2004, while the policy was in ef fec t, damag e to an interior 5 common party

wall betwe en the Da ltons’ building and a n adjac ent building wa s discovere d. The 6 Daltons immediately repor ted the dama g e and c laimed ag ainst the policy . On J une 10, 2004, the 7 New Y ork City

Depa rtment of B uildings orde red that the building be va cate d. 8 Har ley sville disclaimed cover ag e, asse rtingthat the damag e fe ll within t he policy 9 exclusions. The Daltons then reta ined B enjamin L avon, a pr ofessional e ng ineer , to conduct an 10 analy sis of the structura l failure of the par ty wall. The D altons and Ha rley sville agree d to rely

on 1 1 L av o n ’s re p o rtfo r p urp o s es o f t h i s l i t i gat i o n . L av o no b s erv edth atth e p arty wa l l ex h i b i t edl ar ge 12 bulgingof the masonr y wall, movements, dete rioratingmasonry , and cr umbling mortar

joints. 13 The c onditions were hidden f rom view by

a wa ll finish, which preve nted observation of the 14 deterioration. L avon conc luded that the “struc tural fa ilure of the Par ty Wall resulted from 15 de te ri or ate d mo rt ar j oints” and that “the deterioration of the morta r joints that resulted in the 16 Collapse of the Party Wall was hidden from view ” bec ause of a finish which c ompletely cover ed 17 the Part

y Wal l. 18 The policy provides that Ha

rley sville will pay

for “ direc t phy sical loss of or damag e . . . 19 cause d by

or re sulting fr om any

Covered Ca

use of L oss.” A Covere d Cause of L oss includes 20 ri sk s o f d ir e c t phy sic a l lo ss. 21 Section B of the policy

provides for

exclusions. S ection B .2.k(2) e x cludes c overa g e for 22 “dec ay , deter ioration, . . . or any quality in [ the] property

that cause s it to damag e or de stroy4 1 itself.” Section B .2.k(4) e x cludes c overa g e for “[s] ettling, c rac king, shrinking or expansion.” 2 And finally , Section B.2.i. e x cludes c overa g e for “[c]oll apse, exc ept as provided in the 3 Ad dit ion al C

ov e ragefor

Col lapse ” (e mphasis added)

. 4 Th e Ad dit ion a l Co ve ra g e fo r C oll a ps e un de r S e c tio n A .5 .d . s tate s th at H arl e y sv ill e wi ll 5 pay

for loss or damag e re sulting fr om “risks of dire ct phy sical loss involving collapse of a 6 building or a

ny part of a building ca

used . . . by

. . . (2) [h]i dden dec ay .” It adds, howeve r, that 7 collapse doe s not include “settling , cra cking , shrinkag e, bulg ing or expansion.” 8 The district cour t gr anted the de fenda

nt insurer’s motion for summar y judgme nt, relying 9 essentially

on two rea sons. First, the cour t construed the L avon report as mea ning that the 10 damag e to the building c onsisted of “bulg ing,” which is expressly excluded by

the terms of the 11 Ad dit ion a l Co ve ra g e fo r C oll a ps e . Se c on d, the c ourt

re a d th e op ini on s o f N e w Y or k St ate 1 2 co urt s , ci t i n g Graffeo v. U.S. Fide lity &Guaranty Co. , 246 N.Y.S.2d 258 (App. Div. 2d Dep’t 13 1964) and Re c tor St. Fo od En te rp ris es Ltd

. v . F ire&Cas ua lty

In su ra nc eCo. of C

on ne c tic ut. , 14 82 7 N .Y .S. 2d

18 (A pp . D iv. 1s t D e p’ t 20 06 ), to m e an th at “ c oll a ps e ” c ov e ra g e a

pp lie s o nly

to 15 tot a l or

ne ar t ota l de str

uc tio n o f t

he pr op e rt

y . B e c a us e it w a s und isp ute d th at th e Da lto ns ’ 16 building wa s not destroyed, but mere ly structura lly

unsound, the district court ente red summar y 17 jud g me nt i n f

avo r o f H arl e y sv ill e . We be lie ve the c ourt e rr e d in bo th r e sp e c ts. 18 DI SCU SSIO N 19 Under

New Y ork law, a

n insurance contra ct must be interpre ted so that a c lear and 20 unambiguous policy provision is given its plain and or dinary meaning

. U.S. Fid. &Guar. Co. v. 21 An nu nz iat

a , 67 N.Y.2d 229, 232 (1986) . Ambiguities a re g ener ally

resolved in the insure d’s 22 favor

. Id.5 1 The policy in question is an all-risk policy for damag e to the cove red building . Under an 2 all-risk policy , any losses cause d by

fortuitous peril ar e cove red unle ss the policy contains an 3 express provision ex cludingthe losses. See Pa rk s R e al E sta tePu rc ha sing Gro up v . S t. Pau l F ire 4 &Marine Ins. Co. , 4 72 F .3 d 3 3, 41 (2 d Ci r. 20 06 ). To de te rm ine wh e the r t he po lic y a pp lie s to 5 the par

ticular damag e, we must follow the policy ’s serpe ntine of “Prope rty Coverag e” de scribed 6 above in the B ackground of this opinion. 7 A

. The Lav on Re po rt d id n ot a ttr ibu tec oll

apseto “ bu lgi ng.” The district cour t rea soned 8 as follows: “The Daltons purcha sed an insura nce policy

which . . . explicitly

did not insure . . . 9 ag ainst bulgingcause d by hidden dec ay , which is exactly what the Da ltons’ own expert [L avon] 10 repo rt e d w a s th e c a us e of the str uc tur a l im

pa ir me nt. Eq uatin gbu lg ingwi th c oll a

ps e , whic h is 11 what the Da ltons are a sking the court to do, is an unre asonable rea ding of the Policy .” 12 We believe this rea soning w as base d on a misunderstandingof L avon’s r eport and the 13 terms of the policy . The c ourt understood L avon’s r eport to identify “bulg ing” as the de fec t 14 constituting the c ollapse of the pa rty wall. B ut that is not what L avon wr ote. He did indee d 15 me nti on

“ bu lg ing ,” no tin gthat “ the pa rt y wa ll e xhibi te d la

rg e bu lg ingof

the ma so nr

y .” I f t his 1 6 h adb ee nth e o n l y d ef ec tL av o no b s erv ed , we wo u l d agr ee wi thth e d i s tri ctco urtth atco v er age 1 7 wo u l d

b e e x cl u d edb y

th e c l au s e o f t h e “ Ad d i t i o n al C o v er age s ” th at , af t er s p ec i fyi n g co v er age 18 for “ collapse,” adds that “[c]ollapse does not include . . . bulg ing.” 19 B ut b ulg ingwa s n ot t he on ly de fe c t th at L avo n o bs e rv e d. As no te d a bo ve , h e a lso 20 observe d “cr

umbling and de teriorated[ mortar joints] that wer e hidden f rom view,” and he 21 conclude d: 22 (a) [T]he str uc tur a l f a ilure of the Part y Wal l r e su lte d f

ro m de te ri or ate d mo rt ar j oints.6 1 (b ) [T]he de te ri or atio n o f t he mor tar j oints that r e su lte d in

the Col la ps e of the Part y 2 Wall was hidden from view

. . . . 3 The c ondition L avon identified a s the ca use of c ollapse wa s not “bulg ing,” which the policy 4 excludes, but hidden deterior ation. The policy expressly cover s “collapse ” if c aused by “[h] idden 5 d e c ay . ” ( L av o nn o te d th at h e u s e d

th e w o r d s “ d e te r io r ati o n ” an d “ d e c ay” inte r c h an g e a

b ly

. ) We 6 there fore believe the district court wa s mistaken in construingL avon’s f inding of collapse to be 7 predic ated on the e x cluded c ondition, “bulging .” 8 B. Ne w York lawis u ns e ttle d a s to theme an ing of “ c oll apse .” Citi nga rulingof the 9 New Y ork Supreme Court, Appe llate Division, Second Depa rtment, Graffeo , 246 N.Y.S.2d 258, 10 the district court rule d that the term “ collapse” in an insuranc e policy means “ total or nea

r total 11 destruction,” a

nd is not satisfied by

a condition of “ substantial impairment of the structur al 12 integrity

of a building .” The district court re cognized that a rulingof the Appe llate Division, 13 Third Depa

rtment, adopted the contra ry view that “substantial impairme nt of the structura l 14 integrity” wa s sufficient to constitute collapse , and that total or ne ar- total destruction was not 15 require d. Se eRo y al I nd e m. Co. v . Gru nb e rg , 553 N.Y.S.2d 527 (App. Div. 3d Dep’t 1990). The 16 district court, howe ver, c oncluded that Ne w York’ s highe st court had “ tacitly acc ept[ed] t he 17 [ Graffeo c ourt ’s ] narr owde fi nit ion of ‘c oll a ps e ’” by de c lin ingto gra

nt a mot ion fo r l e ave to 18 appea l from the Second D epar tment’s rulingin Graffeo. SeeGraffeo v. U.S. Fid. &Guar. Co. , 19 14 N.Y.2d 685 (1964)

. 20 Th is w a s a mis un de rs tand ingof

the signif

ic anc e of the de nia l of

a mot ion fo r l e ave to 21 appea l an Appellate Division ruling. The district court construe d it as the equivale nt of an 22 aff

irmance of the lowe r cour t’s ruling . Refusal to re view the lowe r cour t’s rulinghas no suchT he ho l d i ng of t he A p p el l at e D i vi si o n, Fir st D ep art m ent i n R e c to r S t. , 8 2 7 N

. Y

. S.2d at 18 , whi ch t he 1 d istric t co u rt d isc u sse d , i s n o t use ful in r e so lvin g the m e a n ing o f t h e p o licy in the p re se n t ca se b e c a u se the p o licy in R e c to r S t. con t ai n ed ex pr es s de f i n i t i on al t er ms , w h i ch a r e n ot pr es en t i n t h e D al t on s ’ pol i cy . I t pr ov i ded, f or ex ampl e, t h at a c ol l aps e wa s “ an a br u pt f al l i n g dow n or c av i n g i n ” an d t h at “ a bu i l di n g t h at i s s t an di n g i s n ot cons i dere d t o be i n a s t at e of col l aps e e ven i f

i t s hows ev i dence of

cr ack i ng , bul gi ng , . . . or expan s i on. ” I d. B ec au se t he R e c to r S t. po l i cy p rovided a de f i ni t i o n of co l l ap se agr eed t o by t he p art i es, whi ch ad d res ses t he am b i gui t y , t he c o u rt’s ru ling is no t a u se ful ind ic a to r o f ho w the N e w Y o rk c o u rts w o u ld ru le in the a b se n c e o f an a g re e d d e finiti o n . In any event , no m at t er how o ne co nst rues t he Fir st D ep art m ent ’ s d eci si o n i n R e c to r S t. , t her e r emai ns a s pl i t i n N ew Y o rk ’s lo w e r c o u rts, w h ic h ha s n o t b e e n re so lve d b y N e w Y o rk ’s hig h e st c o u rt. N o r i s t he i ss ue answered b y our co urt ’ s rul i ng i n B a iley v . Ha rtfo rd F ire In su ra n c e C o ., 565 F. 2d 826 ( 2d C ir. 1 9 7 7 ), w h ic h un d e rto o k to a n sw e r w h e the r u n d e r N e w Y o rk law im p a irm e n t o f struc tur a l i n te g rity su ff ic e d to cons t i t ut e a col l aps e i f

t he “ i ns ur ed propert y [ was ] be demo l i s hed [ or] r educe d t o ru bb l e. ” Id

. at 83 0

. A l t ho ugh B ai l ey wa s no t a d ec i si o n o f a N ew Y o rk c o urt, i t m i gh t no ne t he l ess b e b i nd i ng o n the d i st rict co urt and o n us, as a pri or h ol di ng of

t he Second C i r cui t . Al t houg h t he B ai l ey hol di ng s eems t o f avor t he i ns ur eds on t he ques t i on of ne ed f o r t o t al or near- t o t al de st ruct i o n, we canno t be s ure t hat t he p o l i cy i n B ai l ey was s uf f i ci ent l y s i mi l ar t o t he po l i cy her e a t i s s ue t o m ake i t a u s ef ul pre ceden t . Fr om wh at we can di s cer n a bo ut t he B ai l ey p o licy, the re a re su re ly s ubs t ant i al di f

f er enc es . T he B ai l ey cour t he l d t hat wh i l e t he po l i cy di d not r equi r e t hatt he propert y be “ dem ol i s hed [ or] r educe d t o ru bb l e, ” t he t er m “ col l aps e” as us ed i n t hat pol i cy di d re qui r e “ a s ud den i mpa ctt h at i s de s t r u ct i v e of t he s t r uct ur al i nt egr i t y of t he i ns ur ed bui l di ng . ” I d. ( emp has i s added). T he po l i cy i n t he cas e bef ore us provi des cover age f

or “ col l aps e” t hat i s ca us ed by bot h “ hi dd en decay ” a nd “ hi dd en i ns ect or ver mi n damage

. ” I n t hi s r es pect t he pres ent pol i cy s ur el y di f f er s f r om t he B ai l ey pol i cy . I f i t h ad cov er ed col l aps e ca u s ed by “ h i dden de ca y ” or “hi d d en i nsect or verm i n da m age, ” t he co urt co ul d not have co ncl ud ed t hat a “ sudd en i m p act ” was r eq ui red. B ei ng cer t ai n t hat t her e a r e s i gn i f i can t di f f er enc es bet ween t he B ai l ey po l i cy and t he D al t o ns’ po l i cy, but unsur e as t o t he nat ur e a nd ex t ent of

t he di f f er enc es , we bel i eve i t woul d be unw ar r ant ed t o concl ude t hat t he B ai l ey ho ld ing is b ind ing o n us w ith re sp e c t t o the D a lto n s’ p o licy. 7 1 signif

ic anc e . T he Court

of Ap pe a ls r e c e ntl y

re ite rate d th at th e “ de nia l of a mot ion fo r l e ave to 2 appea l is not equivalent to an aff irmance and has no pr ece dential value.” Franklin v. Mine r , 7 3 N.Y.3d 735 (2006)

. 4 Th e state of the law i n N e w Y or

k w ithre sp e c t to the me anin gof the te rm “ c oll a ps e ” in 5 such a policy

is a conflict of

Appellate D ivision rulings as to whethe r “substantial impairment of 6 the structura l integrity of the building ” suff

ices to come within the term, as held by the Third 7 Depa

rtment in Grunberg, or whe ther “ total or nea r total destruc tion” is require d, as held by the 8 Second De partment in Graffeo. 1 9 Acc ording ly , New Y ork law pr ovides no clea r answe r whe ther c overa g e for “collapse ” 10 cause d by

“hidden de cay” cove rs a buildingwhose struc tural integrity was impaire d by 11 deteriorated morta r joints that were hidden from view , or re quires that the buildinghave suf fer ed8 1 a tot a l or ne ar- tot a l de str

uc tio n ( or so me oth e r f

or mul atio n th e Court

of Ap pe a ls m ay

e ve ntu a lly 2 settle on). 3 C. Suddenness is not required. Har ley sville argues that, re g ardle ss of whethe r 4 collapse r equire s near -total destruc tion or is satisfied by substantial impairment of integrity , New 5 Yo rk

law r e qu ir e s in

e ith e r s c e na

ri o th at th e c on dit ion

ari se su dd e nly . In s up po rt , it c ite s b oth 6 Grunberg and Bailey . In both case s, the courts c oncluded that c ollapse under the policies at issue 7 require d a sudden de structive for ce, a nd rema nded for trial of the que stion whether the 8 impairment of structur al integrity was the pr oduct of a

sudden destruc tive forc e or a slow 9 deterioration. 10 The a

rgument fails. While we do not know the full text of the policies in those case s, we 11 can be confide nt they differ ed fr om this pol icy with reg ard to a

ny require ment of suddenne ss. 12 The policy

at issue expressly

provides cove rag e for

collapse c aused by

“hidden de cay” and 13 “hidden insec t or vermin dama g e.” B y their ver y nature , hidden dec ay

and hidden insec t or 14 vermin dama g e occ ur slowly and not as a

sudden destruc tive forc e. Eve n if the Grun be rg and 15 Baileyopinions should be read to mea n that the term “ collapse,” without further e x planation, 16 require s a sudden de structive for ce, that is surely not the case wher e the policy in question 1 7 d e f

i n e s c o l l a p s e i na m ann e r wh i c he x p r e s s l y i n c l u d e s c o n d i t i o n s th ato c c ur o n l y s l o w l y. 18 D. We c on c lud e that th e pla in t e xt of Ha rl e y sv ill e ’s po lic y

is “ ambi guo us and

su sc e pti ble 19 of two re asonable interpre tations,” State v. HomeIndem . Co. , 66 N.Y.2d 669, 671 (1985) , by an 20 aver ag e insured upon r eadingthe policy , Mo sto w v . S tateFa rm In s. Cos

. , 88 N.Y.2d 321, 326-27 21 (1996). The policy languag e, re ad as a

whole, does not re solve the question of whe ther “ total or 22 near

total destruction” is re quired, a nd the ca se law in Ne w York doe s not supply a cle ar9 1 definition of “c ollapse” that might clarify the ambiguity . We also note that other insure rs in New 2 York have used f

orms that speak muc h more dire ctly to the dispute involved here

. E.g. , Rec tor 3 St. , 827 N.Y.S.2d at 18 (c onstruing policy languag e that a “building that is standingis not 4 co n s i d er edt o b e i na s t at e o f c o l l ap s e e v eni f i ts h o ws ev i d en ce o f c ra ck i n g, b u l gi n g, s aggi n g, 5 bending , leaning , settling, shrinka g e or e x pansion”). 6 Havingfound a g enuine a mbiguity , we must apply

the rule that ambiguities in insuranc e 7 policies are g ener ally resolved in f

avor of the insured. An nu nz iat

a , 6 7 N

. Y

. 2 d

at 2 3 2

. We 8 th e r e f

o r e r e j e c tth e d i s tr i c tc o urt ’ s r

u l i n gth atth e D a l t o n s ’ c o v e r a g e f o r c o l l a p s e c o v e r s o n l y a 9 total or nea

r-total destruc tion and not a substantial impairment of the integrity of the building

. 10 We vacate the judgment and re mand for f urther pr ocee dings in a ccor dance with this opi nion. 11 CO NC LU SION 12 Th e Judgme nt i s VAC AT ED and the c a se re mand e d f

or fu rt he r p ro c e e din g s.