On Appeal from the United States District Court for the District of New Jersey.
Gibbons, Chief Judge, Weis, Circuit Judge, and Kelly, District Judge.*fn*
In this diversity declaratory judgment suit by a policy owner against the issuer of a named peril homeowners' insurance policy, the policyholders, John and Elaine Ercolani, appeal from a judgment in favor of the issuer, Excelsior Insurance Company. The judgment was entered after a bench trial in which the trial court found that the physical loss for which the Ercolanis sought recovery was "a collapse of a building or any part of a building" within a named peril in the policy, but was excluded by the policy's water damage exclusion. We conclude that the trial court's finding of collapse within the named peril is not clearly erroneous, and is consistent with New Jersey law, but that the court committed legal error in applying the water damage exclusion. Thus we will reverse and remand with a direction to address other Excelsior defenses which the trial court did not address.
The Ercolanis, in August, 1984, purchased a home in Audobon, New Jersey, and simultaneously purchased a named peril homeowners policy from Excelsior. That policy insured against the "risk of direct physical loss to covered property involving collapse of a building or any part of a building caused only by one or more of the following . . . b) hidden decay; (c) hidden insect damage . . . ." It did not cover "loss to . . .[a] foundation . . . unless the loss is a direct result of the collapse of a building," nor did it cover "settling, cracking, shrinking, bulging or expansion." The policy also provided:
We do not cover loss resulting directly or indirectly from . . .
3. Water Damage, meaning:
a. flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these, whether or not driven by wind;
b. water which backs up through sewers or drains; or
c. water below the surface of the ground, including water which exerts pressure on, or seeps or leaks through a building, sidewalk, driveway, foundation, swimming pool or other structure.
On the evening of January 21, 1985, the Ercolanis heard loud moaning and shrieking noises from the south wall of their home, observed the wall bulge inward, and with help of a neighbor erected a system of wooden trusses to prevent disintegration of the south foundation wall. Two days later they sent a property loss notice to Excelsior, which denied coverage on the grounds that there was "no peril covering loss caused by termites," and that "there has not been any collapse." The letter also stated, "I would like to point out further that our engineer noted cracks in the mortar and block caused by hydrostatic pressure. Again, there is no peril covering such a loss. Indeed the policy specifically excludes that ...