George POSS et al., Plaintiffs and Appellants, v. STATE FARM FIRE AND CASUALTY COMPANY, Defendant and Appellant.
George and Elsie Poss appeal a judgment in favor of State Farm Fire and Casualty Company following a bifurcated court trial on the issue of coverage under an all-risk homeowner's policy. They contend the latent defect exclusion in the policy is ambiguous, that the cause of damage to their home was readily apparent by reasonable inspection, that a covered peril was the efficient proximate cause of the loss, that State Farm waived or is estopped from raising the exclusion, and that their loss is covered since the damage resulted in the “constructive collapse” of their home.
In its appeal, State Farm contends the court abused its discretion by refusing to allow it to recover the costs of certified copies of 10 depositions taken by the Posses' counsel.
FACTUAL AND PROCEDURAL BACKGROUND
From 1977 until June 1987, State Farm insured the Posses' home in Cypress. In June 1977, it issued the Posses an all-risk homeowners policy (form FP–3923), which covered the property against “all risk of physical loss” except those specifically excluded. In June 1980, State Farm issued another substantially identical policy (form FP–7103.1). In both policies, a loss caused by or resulting from earth movement or latent defect was excluded.
Beginning in 1976, the Posses noticed small white spots on the carpeting. When the carpeting was removed and replaced in 1977, they observed “discoloration on the back of the carpeting.” They noticed dark spots on the floor of the garage, as well as holes in the cement and cracks in the garage area. The condition gradually worsened and the cement began to chip away and turn into a white powder.
The Posses submitted a claim to State Farm in July 1985. A State Farm representative inspected the damage and took a statement from Elsie Poss. In March 1986, State Farm forwarded a copy of a report based on subsurface soils testing conducted by American Geotechnical. In subsequent declarations submitted to the trial court, Elsie Poss declared that when she received the report she understood “the damage ․ was primarily caused by corrosion and poor quality concrete.” George Poss declared that “when I received this report, I learned for the first time that the cause of the damage could be attributed to the negligence of the builder/developer in constructing the foundation․”
State Farm denied the Posses' claim in April 1986, basing its denial on exclusions in the policy, including loss caused by latent defect, cracking or expansion of foundations or floors and earth movement. State Farm added that while it had not determined the cause of the earth movement, “if the cause of the movement is other than the natural or normal condition of the earth, it must, per force, be a result of one of the types of acts set forth in the exclusions․”
On August 1, 1986, the Posses filed a complaint for damages, alleging breach of contract, breach of the covenant of good faith and fair dealing, and breach of statutory duties. They alleged “the condition of the property ․ constituted a latent defect/inherent vice․” They reiterated that contention in their first amended complaint and in opposition to a demurrer by State Farm.
During the course of pretrial proceedings, State Farm moved for summary judgment and/or summary adjudication of issues four separate times. The court denied the first motion, but summarily adjudicated the fact that the Posses' loss or damage first manifested and occurred on or before July 1985.
In response to State Farm's second motion, the court denied State Farm's request for an adjudication that a suit under the subject policy (FP–7103.1) was barred by the one-year statute of limitations, but granted that motion as to the prior policy (FP–3923) and gave the Posses leave to file an amended complaint.
The Posses filed a second amended complaint and, after a demurrer on statute of limitations grounds was overruled, State Farm filed a third motion for summary judgment or summary adjudication of issues, contending the damage was excluded under the latent defect exclusion. The court once again denied the motion.
Trial began on October 8, 1991. The court bifurcated the issues to first determine whether State Farm waived or was estopped from raising the latent defect exclusion as a defense. The court permitted the Posses to amend the complaint to allege that during the investigation and handling of the claim State Farm made no reference to latent defect as a basis for denying the claim. However, as the court noted, State Farm's reservation of rights letter referred to the latent defect exclusion on the first page. In a follow-up letter reiterating the denial, the latent defect language was stated at the top of page two. Thus, the court concluded State Farm did not waive its right to raise the exclusion.
The court then proposed a procedure for trial, suggesting “something like a motion for nonsuit after an opening statement where we look at the facts.” The Posses' counsel did not object to proceeding in this manner. The court then considered the Posses' offer of proof to determine whether there was the potential for coverage under the policy. The Posses offered the testimony of three expert witnesses, one of whom would contend that “the efficient proximate cause of the loss is the failure of the contractor to place a vapor barrier between the soil and the slab as required in the specific specifications for the homes built in this tract and for the Poss home at the time of the construction.” The Posses' counsel also offered testimony of an insurance expert who would opine that the latent defect exclusion was not applicable to the facts of this case. Although the court noted that determination was a question of law, she permitted counsel to offer the testimony.
Following argument, the court invited State Farm to bring a motion for summary adjudication of issues as to its defense of exclusion for loss caused by latent defect or inherent vice. State Farm did so, in part contending that a latent defect is one which is not apparent to or readily observable by the reasonably prudent person or homeowner, but is discovered by an expert after the failure.
The court relied primarily upon the Posses' unchallenged declarations and the testimony of their expert who offered the opinion that “failure of the developer/builder to place a moisture barrier between the slab and the soil and the slab of the Posses' home” was the cause of the damage. The court concluded the latent defect exclusion applied and that it was not ambiguous, and ruled as follows: “But for the failure of the developer/builder to place a moisture barrier between the slab and soil, the slab of [the Posses'] home would have in all probability performed satisfactorily throughout its entire projected useful life. This missing moisture barrier constituted a defect in the slab system which was not apparent upon reasonable inspection by [the Posses] prior to the inception of any of the policies sued upon in this case. The test to determine whether a defect is latent, as a matter of law, is an objective test based on the reasonable expectations of the average consumer. Accordingly, as a matter of law, the defect was latent. Thus, the latent defect exclusion contained in each of the policies sued upon operates as a matter of law to preclude coverage and recovery for [the Posses]․ Further, the absence of coverage defeats [the Posses'] bad faith and unfair practice claims.” The court granted summary adjudication of State Farm's affirmative defense based on the latent defect exclusion, judgment was entered for State Farm, and this appeal followed.
I. STANDARD OF REVIEW
The Posses challenge the procedure employed by the trial court. The procedure was, to say the least, unusual. The court initially proposed “something like a motion for nonsuit after an opening statement where we look at the facts.” Later, the court invited State Farm to bring a motion for summary adjudication of issues on its latent defect exclusion. Of course, the standards of review from a judgment following the granting of a motion for nonsuit and a motion for summary judgment are dramatically different. (See, e.g., Nally v. Grace Community Church (1988) 47 Cal.3d 278, 291, 253 Cal.Rptr. 97, 763 P.2d 948; Evan F. v. Hughson United Methodist Church (1992) 8 Cal.App.4th 828, 841–842, 10 Cal.Rptr.2d 748.) Nonetheless, the trial court clearly and properly intended “to rule as a matter of law as to whether the original policy covers the loss.” Accordingly, there was no error.
On review, we independently interpret the policy as a question of law. (Carty v. American States Ins. Co. (1992) 7 Cal.App.4th 399, 402, 9 Cal.Rptr.2d 1 (hereafter Carty ). In interpreting the policy, clear and explicit meaning of the contract provisions, interpreted in their ordinary and popular sense, controls our interpretation. “Thus, if the meaning a layperson would ascribe to contract language is not ambiguous, we apply that meaning.” (AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807, 822, 274 Cal.Rptr. 820, 799 P.2d 1253.) An ambiguous term in an insurance policy must be construed against the insurer. (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 269, 54 Cal.Rptr. 104, 419 P.2d 168.) However, “while insurance contracts have special features, they are still contracts to which the ordinary rules of contractual interpretation apply․ If contractual language is clear and explicit, it governs.” (Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264, 10 Cal.Rptr.2d 538, 833 P.2d 545.) Under these rules of interpretation, “a court that is faced with an argument for coverage based on assertedly ambiguous policy language must first attempt to determine whether coverage is consistent with the insured's objectively reasonable expectations. In so doing, the court must interpret the language in context, with regard to its intended function in the policy. [Citation.] This is because ‘language in a contract must be construed in the context of that instrument as a whole, and in the circumstances of that case, and cannot be found to be ambiguous in the abstract.’ ” (Id. at p. 1265, 10 Cal.Rptr.2d 538, quoting Producers Dairy Delivery Co. v. Sentry Ins. Co. (1986) 41 Cal.3d 903, 916, fn. 7, 226 Cal.Rptr. 558, 718 P.2d 920.) Applying these rules of review, we address the merits of the parties' appeals.
II. THE POSSES' APPEAL
The State Farm all-risk homeowners policy covered the Posses' property against “all risk of physical loss” except those specifically excluded. A loss caused by or resulting from earth movement or latent defect was excluded. In Carty, supra, 7 Cal.App.4th 399, 9 Cal.Rptr.2d 1, this court interpreted and applied the latent defect exclusion in a homeowner insurance policy coverage dispute. Like the trial court, we relied upon Acme Galvanizing Co. v. Fireman's Fund Ins. Co. (1990) 221 Cal.App.3d 170, 270 Cal.Rptr. 405 (hereafter Acme ) and concluded that “ ‘where defective construction, design, or fabrication of property results in the property's failure or deterioration before its normal life, and the defect is not apparent upon reasonable inspection but only after a post-failure examination by an expert, then the resulting loss is caused by a “latent defect.” ’ ” (Carty, supra, 7 Cal.App.4th at p. 403, 9 Cal.Rptr.2d 1, quoting Acme, supra, 221 Cal.App.3d at p. 178, 270 Cal.Rptr. 405; see also Code Civ.Proc., § 337.15, subd. (b).) 1
Like the Posses, the Cartys were covered by a homeowners policy which covered “ ‘all risks of physical loss to the property,’ excluding perils such as loss due to inherent vice or latent defect, settling or cracking of the foundation or floors, or earth movement.” (Carty, supra, 7 Cal.App.4th at p. 401, 9 Cal.Rptr.2d 1.) Their water pipes broke, flooding the downstairs portion of the home, and when the carpeting was removed to repair the damage, the Cartys learned the concrete slab and foundation were cracked. The insurer paid for the water damage, but excluded all other damage. The undisputed facts established the Cartys learned of the cracked slab and foundation problems after the water leak, and that “the predominant cause of damage to the slab was inadequate compaction of fill material, inadequate reinforcement of the slab and lack of anchoring of the foundation to bedrock․” (Id. at pp. 401–402, 9 Cal.Rptr.2d 1.) The trial court concluded that because the defects were “neither readily observable nor apparent on reasonable inspection,” the Cartys' loss was excluded as a latent defect. (Id. at p. 402, 9 Cal.Rptr.2d 1.)
On appeal, this court held the latent defect exclusion in the policy was not ambiguous. Like the Posses, the Cartys relied in part on Mattis v. State Farm Fire & Cas. Co. (1983) 118 Ill.App.3d 612, 73 Ill.Dec. 907, 454 N.E.2d 1156 for the proposition that the term latent defect applies only to “some inherent defect in the materials used in construction” and does not include faulty design or work performance. (Id. 73 Ill.Dec. at 913, 454 N.E.2d at p. 1162.) However, we rejected that Illinois authority. Rather, we relied upon Acme, supra, 221 Cal.App.3d 170, 270 Cal.Rptr. 405 and Tzung v. State Farm Fire & Cas. Co. (9th Cir.1989) 873 F.2d 1338 (hereafter Tzung ) in construing California's approach to the latent defect exclusion.
In Acme, a steel kettle ruptured, allowing several tons of molten zinc in a galvanizing process to spill onto surrounding equipment. Acme submitted a claim for property damage and the insurer denied coverage on the ground that the loss was caused by a latent defect. (Acme, supra, 221 Cal.App.3d at p. 173, 270 Cal.Rptr. 405.) Acme sued the insurer, whose motion for nonsuit was granted. (Ibid.) Noting a paucity of California case law interpreting the “inherent vice/latent defect” exclusionary provision, the Court of Appeal relied upon section 337.15, subdivision (b) for the conclusion that a “latent deficiency [is] one ‘which is not apparent by reasonable inspection.’ ” (Acme, supra, 221 Cal.App.3d at p. 178, 270 Cal.Rptr. 405.) The court thus found “the ‘not apparent by reasonable inspection’ standard under ․ section 337.15 constitutes an appropriate standard for determining whether a defect is latent in the context of the exclusionary provisions of an all-risk insurance policy. [¶] Thus, where defective construction, design, or fabrication of property results in the property's failure or deterioration before its normal life, and the defect is not apparent upon reasonable inspection but only after a post-failure examination by an expert, then the resulting loss is caused by a ‘latent defect.’ ” (Ibid.; see also Preston v. Goldman (1986) 42 Cal.3d 108, 123, 227 Cal.Rptr. 817, 720 P.2d 476; Winston Square Homeowner's Assn. v. Centex West, Inc. (1989) 213 Cal.App.3d 282, 291, 261 Cal.Rptr. 605.)
The Ninth Circuit reached the same conclusion in Tzung, supra, 873 F.2d 1338. The Tzungs were insured under an all-risk property policy which contained the standard latent defect exclusionary language. They noticed a series of cracks in the drywall, driveway and slab of their apartment building and submitted a claim to their insurer who denied the claim relying, in part, on the latent defect exclusion. (Id. at p. 1339.) In opposition to the insurer's motion for summary judgment, the Tzungs submitted expert declarations establishing that their damage would not have occurred “had the contractor properly constructed the building to withstand expansion of the soil.” (Ibid.) The Court of Appeals affirmed a summary judgment in favor of the insurer on the basis of the policy's latent defect exclusion, observing that “defects in construction may constitute inherent or latent defects if the problems thus created are not readily discoverable.” (Id. at p. 1342.) Because the defects alleged by the Tzungs were imbedded in the ground, they were “unknowable absent a close examination of an expert” and could not be readily discoverable. (Ibid.) Thus, the Tzungs' loss was “unambiguously excluded from coverage” by the inherent vice or latent defect exclusion in the policy. (Ibid.)
In Carty, we agreed with the reasoning in Acme and Tzung, pointing out that the Cartys knew “something was amiss ․ when, on removing water-soaked carpeting and carpet pads, they discovered cracks in the concrete slab and foundation. The cause of the cracks was not ascertained until expert examination, including soil testing, had been performed. The cause was determined to be inadequate compaction of fill material, inadequate reinforcement of the slab and lack of anchoring of the foundation to bedrock. On the basis of those undisputed facts, the [trial] court concluded the construction defects were neither readily observable nor apparent on reasonable inspection.” (Carty, supra, 7 Cal.App.4th at pp. 403–404, 9 Cal.Rptr.2d 1.) We concluded the alleged construction defects were latent defects and the insurer was not obligated to indemnify the Cartys. (Ibid.) 2
Carty is controlling here. First, we reiterate that the latent defect exclusion is unambiguous and reject the Posses' reliance on out-of-state authority holding to the contrary. (See Mattis v. State Farm Fire & Cas. Co., supra, 73 Ill.Dec. 907, 454 N.E.2d 1156.) A latent defect is one which “is not apparent upon reasonable inspection but only after a post-failure examination by an expert․” (Carty, supra, 7 Cal.App.4th at p. 403, 9 Cal.Rptr.2d 1; Acme, supra, 221 Cal.App.3d at p. 178, 270 Cal.Rptr. 405; Tzung, supra, 873 F.2d at p. 1342.) 3
Here, as in Carty, the defect was not known to the Posses until an expert examined the property after the failure. The Posses admit “the efficient proximate cause” or the “cause that set all other causes in motion” was contractor or builder negligence in failing to place a vapor barrier between the soil and the slab. They learned the cause of the damage could be attributed to the builder or developer's negligence in constructing the foundation only after expert examination and subsurface soils testing. Based upon these undisputed facts, the trial court properly found that the loss was the result of a latent defect and was therefore excluded under the policy.4
The Posses also contend the court erred in concluding the loss was caused by a latent defect because the cause of the damage was readily apparent to their expert without any testing. However, that is not the test. The test for determining whether a defect is latent is an objective test measured by the perceptions of the reasonable consumer or homeowner; it is “an objective test based on the reasonable expectations of the average consumer,” and “not a subjective one, applied to each individual user․” (Preston v. Goldman, supra, 42 Cal.3d at p. 123, 227 Cal.Rptr. 817, 720 P.2d 476; Geertz v. Ausonio (1992) 4 Cal.App.4th 1363, 1368, 6 Cal.Rptr.2d 318; Winston Square Homeowner's Assn. v. Centex West, Inc., supra, 213 Cal.App.3d at p. 290, 261 Cal.Rptr. 605.)
Here, the Posses declared they never knew the cause of the damage to their property until after expert investigation and soils testing. The assertion that their expert could have or did discover the defect without testing, but only “after visual inspections,” is unpersuasive. Moreover, the suggestion is belied by the undisputed facts that they did not learn of the defect until after expert examination. Their experts conducted an extensive study and evaluation, reviewing reports, conducting a site review, excavating and boring to a depth of 10.5 feet, and conducting laboratory testing of samples collected from test excavations. As the Posses' expert declared, “a layperson would not have appreciated the gravity of the problem to the structure by simply observing the dark spots and crystallization.” And, the Posses repeatedly conceded they did not know the cause of the damage until after the post-failure inspection and testing by their experts. Where a defect is not apparent upon reasonable inspection by the homeowner but only after post-failure examination by an expert, the loss is caused by a latent defect. (Carty, supra, 7 Cal.App.4th at p. 403, 9 Cal.Rptr.2d 1; Acme, supra, 221 Cal.App.3d at p. 178, 270 Cal.Rptr. 405; Tzung, supra, 873 F.2d at p. 1342.)
The Posses next contend State Farm waived or is estopped from raising the latent defect exclusion. We disagree.
One month after the Posses submitted their claim, State Farm sent a three-page reservation of rights letter which specifically cited, on page two, the latent defect exclusion as a basis for questioning coverage. After investigating the loss, State Farm denied the claim, again citing the latent defect exclusion on page two of the denial letter. Thus, as the trial court found, State Farm satisfied its duty to assert the basis for its rejection of the claim in its denial letter.
The Posses also claim State Farm waived the latent defect defense by not asserting it in an earlier answer. However, the law does not impose a waiver by virtue of the failure to assert a defense in a superseded pleading. Moreover, a defendant need not deny facts or allegations which it admits. (§ 431.20(a).) Here, the Posses' complaint and first amended complaint alleged their loss was caused by a latent defect which existed in the property since its construction. State Farm admitted that was so and had no reason to cite the latent defect exclusion as an affirmative defense. Moreover, State Farm did raise the affirmative defense, not only in its reservation of rights letter and its denial letter, but in its answer to the operative second amended complaint. Accordingly, it did not waive its right to rely on the exclusion. (Hydro Systems, Inc. v. Continental Ins. Co. (9th Cir.1991) 929 F.2d 472, 476.)
Finally, the Posses contend the trial court erred in determining that their property loss is not covered because the damage resulted in “constructive collapse” of their home. No California court has analyzed and defined the term “constructive collapse.” However, “a numerical majority of other jurisdictions ․ have held that the word ‘collapse’ has a plain and natural dictionary meaning, which they follow.” (Olmstead v. Lumbermens Mutual Ins. Co. (1970) 22 Ohio St.2d 212, 259 N.E.2d 123, 126.) Webster's defines “collapse” as “BREAKDOWN ․ sudden failure ․ DISINTEGRATION, RUIN, DESTRUCTION․” (Webster's Third New International Dictionary, supra, at p. 443.) “To collapse” means “to break down completely ․ crumble into insignificance or nothingness ․ DISINTEGRATE․ to fall or shrink together abruptly and completely ․ fall into a jumbled or flattened mass through the force of external pressure․” (Ibid.) An impending collapse is not a collapse for purposes of homeowner insurance coverage. (See Heintz v. United States Fidelity and Guaranty Co. (Mo.Ct.App.1987) 730 S.W.2d 268, 269.)
The Posses' home has not collapsed. The only evidence submitted in support of that contention is their expert's statement that “if no remedial measures are taken and the slab is not replaced, the floor slab will continue to gradually deteriorate to the point that the structure will be rendered unfit for occupancy or unsuitable for use as a home.” The allegation of “impending collapse” is insufficient to establish coverage under the policy.
The cases relied upon in this regard by the Posses are inapposite. In Hughes v. Potomac Ins. Co. (1962) 199 Cal.App.2d 239, 18 Cal.Rptr. 650, the earth under the plaintiffs' home slid into a creek, leaving the home unsupported. The court held that where the insured dwelling had been damaged by a covered risk and there is imminent peril of more damage, the homeowner's policy provided coverage for the cost of stabilization. (Id. at pp. 244–245, 18 Cal.Rptr. 650.) Here, by contrast, there is no claim of the need for stabilization and the Posses have not established that their damages were caused by a covered peril.
Similarly, in Beach v. Middlesex Mut. Assur. Co. (1987) 205 Conn. 246, 532 A.2d 1297 the structure had clearly collapsed. The testimony was “that the foundation wall had tipped over into the basement from the top and was no longer supporting the house.” (Id. 532 A.2d at pp. 1298–1299.) In Nationwide Mut. Fire Ins. Co. v. Tomlin (1986) 181 Ga.App. 413, 352 S.E.2d 612, the dwelling's foundation was built on tree stumps which had decayed, causing the foundation to sink and the brick walls to pull away from the building. (Id. 352 S.E.2d at p. 614.) Once again, there was clearly an existing collapse. By contrast, the damage in this case does not constitute a “collapse” so as to trigger coverage under the policy.
For these reasons, the judgment in favor of State Farm is affirmed.
III. STATE FARM'S APPEAL ***
The judgment is affirmed. The parties shall bear their own costs on appeal.
1. All statutory references are to the Code of Civil Procedure.
2. In opposition to State Farm's third motion for summary judgment, the Posses relied in part upon Winans v. State Farm Fire & Cas. Co. (S.D.Cal.1990) 743 F.Supp. 733 for the proposition that “simply because plaintiffs did not discover the gravity of the damage to the property until a geotechnical report was obtained does not mean that the damage was caused by a latent defect,” and that, notwithstanding the fact that the defect was not apparent until a post-failure examination by an expert, a triable issue of fact existed as to whether the defect was “readily discoverable.” However, the Ninth Circuit has since reversed that decision. (Winans v. State Farm Fire & Cas. Co. (9th Cir.1992) 968 F.2d 884.)
3. This definition is consistent with ordinary lay terminology. The dictionary defines “latent defect” as “an unknown defect ․ not discoverable by such inspection or test as the law reasonably requires under all the circumstances.” (Webster's Third New International Dictionary (3d ed. 1986), p. 1275.) “Latent” is that which is “existing in hidden, dormant, or repressed form but [usually] capable of being evoked, expressed, or brought to light․ LATENT applies to that which is submerged and not clearly apparent or certainly present to anybody most searching examination but may emerge and develop with effect and significance․” (Ibid.) Black's Law Dictionary defines “latent defect” as “a hidden or concealed defect. One which could not be discovered by reasonable and customary inspection; ․ [¶] Defect of which owner has no knowledge, or which, in exercising reasonable care, he should have had no knowledge. [Citation.] A latent defect ․ is one not discoverable by inspection made with ordinary care․” (Black's Law Dict. (5th ed. 1979) p. 794–795.)
4. The Posses also contend the Sabella/Garvey efficient proximate cause analysis applies here. In those cases, the Courts of Appeal held that where a covered peril is the efficient proximate cause of the loss, the insurer may not defeat coverage by discovering an exclusion elsewhere in the chain of causation to deny coverage. (Garvey v. State Farm Fire & Casualty Co. (1989) 48 Cal.3d 395, 402–403, 257 Cal.Rptr. 292, 770 P.2d 704; Sabella v. Wisler (1963) 59 Cal.2d 21, 33–34, 27 Cal.Rptr. 689, 377 P.2d 889.) Here, however, there was no problem of concurrent causes. The trial court's finding that the “efficient proximate cause” of the loss was the failure to install a moisture barrier between the slab and the soil beneath the Posses' home was supported by the evidence.
FOOTNOTE. See footnote *, ante.
MOORE, Associate Justice.
SILLS, P.J., and WALLIN, J., concur.