A Connecticut law firm has filed an unusual proposed class action law suit in federal district court, claiming that over one hundred insurers have conspired over the years with the Insurance Services Office (ISO) to eliminate coverage for damage to home foundations that were constructed years ago with defective concrete.  

In Halloran, et al v. Harleysville Preferred Ins. Co., No. 16-0133 (D. Conn.) four Connecticut families are seeking recovery on behalf of a class of hundreds or thousands of “individuals who own a home in the Connecticut towns of Manchester, Andover, Ellington, Stafford Springs or any other Connecticut town located east of the Connecticut River whose homes are insured by any of the Insurance Defendants, and whose homes have sustained ‘pattern cracking’ including but not limited to horizontal and vertical cracks on their basement walls, and whose bad foundation claims have been denied or will be denied by the Insurance Defendants, which denials are or will be based on the same standardized language regarding the term ‘collapse’, the term ‘basement’, the term ‘foundation’, the term ‘decay’, the term ‘hidden’ and the term ‘retaining wall.’”

The plaintiffs claim that their “basement walls are in a state of collapse” because they were built with defective concrete containing deleterious iron sulfide minerals mined by J.J. Mottes & Co. It is alleged that the oxidation of these minerals produces a chemical reaction that causes the concrete to swell and crack and the cement paste to break down—ultimately causing these homes to collapse into their basements.

While it might seem that the remedy for these complaints would be a law suit against J.J. Mottes or other companies that were responsible for building the homes or selling or distributing the allegedly defective concrete, the Halloran plaintiffs have taken the novel approach of suing every insurance company that does business in Connecticut (excepting only those Connecticut domiciliaries whose involvement would destroy diversity jurisdiction). These 111 insurers are alleged to have led “the plaintiffs into a sinkhole of financial trouble” by adopting exclusionary language that the insurers have allegedly each uniformly interpreted to preclude coverage for claims of this sort. The plaintiffs claim that the insurers and ISO have conspired to adopt increasingly restrictive “collapse” wordings in their policy in the knowledge that Connecticut homes constructed between 1984 and 1998 with this defective concrete would eventually suffer “pattern cracking” and give rise to claims that might have been covered under earlier, less restrictive policy wordings. (Most property policies contain language stating that “[l]oss to . . . foundation, retaining wall . . . is not included . . . unless the loss is a direct result of the collapse of a building. Collapse does not include settling, cracking, shrinking, bulging or expansion.”)

The Halloran case has been assigned to federal judge Victor Bolden, who recently ruled in Gabriel v. Liberty Mut. Fire Ins. Co., 2015 WL 5684063 (D. Conn. Sept. 28, 2015) that homeowners’ policies were ambiguous with respect to whether cracks in concrete basement walls are excluded “foundations” or “retaining walls.” Judge Bolden ruled that “foundation” can be read both to mean all concrete structures, including basement walls, that support a building from underneath, or, more narrowly, to only include the footing under basement walls that support the entire structure. Similarly, the court found that the term “retaining wall” is ambiguous because it can mean both the freestanding wall that holds in place a mass of earth as well as a wall built to resist lateral pressure or prevent an earth slide. The court noted in its opinion three other rulings in which Connecticut’s federal district courts had found coverage for first party concrete foundation claims. See Karas v. Liberty Ins. Corp., 33 F.Supp. 3d 110, 115 (D. Conn. 2014) and Belz v. Peerless Ins. Co., 46 F. Supp.3d 157, 164 (D. Conn. 2014) and Bacewicz v. NGM Ins. Co., 2010 WL 3023882 (D. Conn. Aug. 2, 2010).

Plaintiffs also argue that the gradual deterioration of their basement walls are a covered “collapse.” Connecticut is among those states that have adopted a broad interpretation of collapse, at least as it was set forth in earlier standard first party forms. In Beach v. Middlesex Mut. Assurance Co., 532 A.2d 1297 (1987), the Connecticut Supreme Court ruled that “collapse” was ambiguous and could mean a “substantial impairment of the structural integrity of the building” even where the building had not actually fallen down. Id. at 1300. Notably, the Supreme Court’s ruling in Beach repeatedly referred to the insured’s basement walls as the building’s “foundation,” suggesting that the state Supreme Court may reject the broad view of coverage that the federal district courts have adopted. The District Court has declined to certify this issue to the Supreme Court, however.

In light of these pro-insurer rulings, it is unclear why a class action forum is deemed necessary to resolve these disputes. Nevertheless, the plaintiffs claim that they should be entitled to class status because the prosecution of individual coverage claims would be wasteful and might result in inconsistent judicial findings whereas a judicial declaration that the “collapse” language in question is ambiguous would be dispositive of each homeowner’s individual claim. The complaint references twenty-four cases that are already pending in state or federal court in Connecticut in which homeowners are seeking coverage for these types of first party loss.

The Halloran plaintiffs allege that their disparate claims are unified by four common questions of law and fact:

  1. Whether Defendant Insurance Companies breached their contract of insurance with the Plaintiffs and putative Class Members by failing to provide coverage for bad concrete claims.
  2. Whether Defendant Insurance Companies and ISO conspired to provide unsuitable homeowners insurance policies to Plaintiffs and putative Class Members all the while being previously aware of bad concrete claims and knowing full well that these policies would not provide coverage for bad concrete claims.
  3. Whether Defendant Insurance Companies, as part of a regular business practice, denied the insureds’ claims in an unfair, deceptive manner that has caused substantial injury to the Plaintiffs and putative Class Members.
  4. Whether the Plaintiffs and putative Class Members suffered losses and, if so, the proper measure of the losses.

Rule 23 of the Federal Rules of Civil Procedure require commonality in order to sustain a class. Commonality is typically achieved through allegations and proof that each of the defendants caused or contributed to the alleged injuries of at least one of the class representatives. No such commonality can be proved here, however, as the plaintiffs (and presumably the class that they purport to represent) were each insured by different carriers over the years. Plaintiffs seek to avoid this jurisdiction obstacle by arguing that insurers engaged in a conspiracy to limit and avoid coverage for these claims. See 5 Moore’s Federal Practice, Section 5-23(b). While this “conspiracy” exception to FRCP 23(2) has been approved by a few courts, it is unclear whether it will find favor in Connecticut.

Even if a “conspiracy” exception is recognized by Connecticut courts, it does not appear that the unsupported assertion in one paragraph of this Complaint that the insurers entered into a “cartel” for the purpose of denying claims meets the level of detail required by Iqbal/Twonbly and should not be tossed out by way of a Rule 12(b)(6) motion.

One must also wonder whether this judge will be intrigued or appalled by the prospect of such a case being visited on him and whether the court will find that this kind of mega-DJ is appropriate for treatment as a Rule 23 class. Although the Complaint states that Rule 23 certification is necessary to deal with the problem comprehensively, it bears noting that the plaintiffs have failed to sue all of the major Connecticut insurance companies so as to ensure diversity jurisdiction and preserve the ability to ensure that the same court that decided the Gabriel case hears their claims. One may only wonder how “comprehensive” an adjudication would be that omits the policies issued by Connecticut domiciliaries such as The Hartford and Travelers.

Finally, there is something extremely strange about a putative class action that focuses on a single policy provision and involved over a hundred defendants, many of whom may not have received a “foundation” claim and may or may not have denied such a claim. Indeed, a class action focusing on the adoption and implementation of an industry-wide exclusion is nearly unheard of. The only comparable example in this author’s experience was 1988 law suit that nineteen state attorneys-general filed against ISO, Allstate, Aetna, CIGNA and Hartford alleging that they had conspired with the Lloyd’s to violate anti-trust law. That case largely dissolved after the U.S. Supreme Court ruled in Hartford Fire Ins. Co. v. California, 509 U.S. 764 (1993) that the P&C companies did not lose their anti-trust immunity under the McCarran-Ferguson Act by allegedly conspiring with foreign reinsurers. The case was remanded to the District Court in California and subsequently settled.