Hunton Insurance Recovery Blog

Earlier this month, the Southern District of New York issued an opinion in The Vale Fox Distillery LLC v. Central Mutual Insurance Company, No. 24-cv-4169 (S.D.N.Y.), which concerned a catastrophic collapse of storage racks holding whiskey barrels at Vale Fox’s distillery, destroying over $2.5 million worth of aging single malt whiskey. The court determined there was coverage for Vale Fox’s loss but left the issue of valuation to be determined another day.

Background

Vale Fox, a small-batch distillery in Poughkeepsie, New York, stored whiskey barrels on metal racks. In December 2023, the racks collapsed, breaking 52 barrels and spilling years’ worth of aging single malt. An engineering investigation concluded that defective welds in the racks’ construction, compounded by the weight of the barrels, caused the collapse.

Vale Fox sought coverage under its industrial processing policy with Central Mutual. The policy covered “direct physical loss of or damage to Covered Property … caused by or resulting from any Covered Cause of Loss,” and specifically included “Stock,” defined as “merchandise held in storage or for sale, raw materials and in-process or finished goods.” The policy also contained “Additional Coverage—Collapse,” which extended coverage when “personal property abruptly falls down or caves in and such collapse is not the result of abrupt collapse of a building,” so long as the collapse was caused in part by “[u]se of defective material or methods in construction … [and] the weight of … personal property.”

Central Mutual denied the claim, arguing that “collapse” applied only to buildings, that “construction” meant building construction (not rack construction), and that exclusions for wear and tear, corrosion, and latent defects barred recovery.

The Decision

The court’s decision offers a detailed roadmap for how collapse coverage operates in commercial property policies. Central Mutual argued that the “Additional Coverage—Collapse” was intended only for building failures. The court disagreed, pointing to the text of the policy itself, which expressly extended collapse coverage to personal property “when such collapse is not the result of abrupt collapse of a building.” To adopt Central Mutual’s reading, the court explained, would render this section “superfluous and meaningless,” violating fundamental principles of contract interpretation.

Central Mutual also insisted that the phrase “defective material or methods in construction” referred exclusively to construction of the insured building. The court rejected this narrow view, holding instead that the defective construction at issue was that of the racks themselves. “[T]he only reasonable interpretation,” it wrote, “is that the defective construction must be of the thing that collapsed.” This interpretation aligns with other courts’ recognition that collapse coverage is not confined to structural building defects but can also encompass personal property losses when the policy language so provides.

Equally significant was the court’s treatment of exclusions. Central Mutual pointed to policy exclusions for wear and tear, corrosion, and hidden or latent defects, citing its expert’s finding that corrosion and aging may have contributed to the collapse. The court held those exclusions inapplicable, reasoning that they could not be read to undo the specific grant of coverage for collapse caused by defective construction combined with the weight of personal property. As the court explained, additional coverage provisions are meant to expand protection, not be nullified by general exclusions. This reasoning is consistent with decisions across jurisdictions holding that where collapse coverage expressly includes perils like defective construction or hidden decay, broad exclusions cannot be stretched to bar recovery.

The court, however, declined to rule in Vale Fox’s favor on valuation. The policy included a “Manufacturer’s Selling Price” clause for “finished ‘stock,’” but the parties disputed whether the destroyed whiskey—still aging in barrels—qualified as “finished ‘stock.’” The court found the term ambiguous and not resolvable on the pleadings, leaving the issue for later proceedings.

Takeaways

First, this decision reinforces that courts will not allow insurers to interpret policy provisions in a way that renders negotiated coverage illusory. Here, the court rejected Central Mutual’s narrow reading that would have effectively stripped collapse coverage for personal property of any practical meaning.

Second, the case highlights an important rule of policy construction: specific coverage grants prevail over general exclusions. Insurers often rely on broad wear-and-tear or defect exclusions to deny claims, but when the policy specifically promises coverage for collapse tied to defective materials or methods, courts are reluctant to let exclusions undo that bargain.

Finally, the decision underscores the importance of policyholders carefully negotiating and understanding valuation provisions. Whether whiskey still aging in barrels qualifies as “finished stock” worth selling-price valuation or merely “stock” subject to replacement-cost valuation could mean millions of dollars in claim recovery. Because the court found the term ambiguous, Vale Fox will have the opportunity to present extrinsic evidence on the parties’ intent—a reminder that ambiguous terms will be construed in favor of the insured, but only after a factual record is developed.

In short, Vale Fox offers policyholders an encouraging ruling on collapse coverage but also a cautionary lesson on valuation disputes—an area where precise drafting and advocacy can make all the difference.