Court Construes Ensuing-Loss Clause In Property Policy

The 1st District Appellate Court recently construed a first-party property insurance policy exclusion for faulty workmanship, with an ensuing loss exception, to allow coverage for inventory damaged by debris that fell during a roof replacement project at a carpet store.

The business’ insurer, Travelers Casualty Insurance Company of America, was represented by Foran, Glennon, Palandech, Ponzi & Rudloff P.C. The Pape Law Firm of Wheaton represented the insured, Moda Furniture. The case is Moda Furniture LLC v. Chicago Title Land Trust Co., 2015 IL App (1st) 140501 (1st Dist. 2015).

Moda leased the premises for its carpet-selling business. In 2011, the landlord hired a roofing contractor for repairs, and the roofer removed the old roof without protecting Moda’s carpets stored on the premises. Moda claimed $450,000 in damages to carpets and other property due to falling gravel, dirt and crud, allegedly resulting from the roofer’s failure to protect the merchandise.

Moda sued the landlord and roofer for the damage. In addition, it made a claim under a business owner’s property coverage policy issued to it by Travelers, seeking coverage for the damage.

While otherwise providing coverage, the policy contained an exclusion for loss caused by faulty workmanship and renovation, subject, however, to an ensuing-loss type exception.

The exception provided that if an excluded cause of loss “results in a covered cause of loss, we will pay for the resulting loss or damage caused by that covered cause of loss.” The exclusion went on to indicate that Travelers would not, in any event, pay for the cost of repairing the faulty workmanship.

Travelers denied coverage based on its view that the exclusion was implicated by virtue of Moda’s allegations that the roofer’s work was negligent.

Moda claimed, however, that the actual cause of loss was the gravel, dirt and crud, that such was the actual cause of loss and covered, and that the exception to the exclusion therefore applied.

Travelers countered that the resulting-loss exception applied only to certain secondary losses that follow as a consequence of the original excluded loss. It further contended that Moda had alleged no such secondary loss, but rather that its damages were caused directly by gravel, dirt and crud that fell through the roof opening.

Moda thus included counts in its amended complaint against Travelers for failure to pay and also for bad-faith damages. Travelers moved to dismiss and following briefing and two rulings, the trial court held that the faulty workmanship exclusion was implicated but that the exception also was triggered, so that Moda had coverage.

In the process, the court certified questions for appeal pursuant to Illinois Supreme Court Rule 308. The questions were whether the damages alleged fall within the first part of the faulty workmanship exclusion and, if so, whether the exception in the second part applies.

Travelers appealed to the 1st District.

Parties’ Positions

In an opinion by Justice Joy V. Cunningham, the 1st District affirmed. Based in part on Moda’s apparent concession, she found that the first part of the exclusion did, in fact, apply, and she then turned to the exception.

Cunningham observed that Travelers relied largely on Board of Education of Maine Township High School District 207 v. International Insurance Co., 292 Ill.App.3d 14 (1997), where a policy contained a latent-defect exclusion applying to asbestos, but an exception for “a loss from covered peril that follows.” The court there found that the school board’s claim for property damage from the release of asbestos fibers was not covered and was not saved by the exception.

Travelers argued that, just as the exception clause in Maine Township did not provide coverage for the asbestos damage, Travelers’ own resulting-loss clause did not allow coverage for damage caused by faulty workmanship.

Travelers also pointed to several out-of-state cases, on the basis of which it contended that the damage to Moda’s inventory was so closely connected to the roofer’s faulty work, that no separable or distinct “covered cause of loss” or “resulting loss” existed that could implicate the exception.

Moda, on the other hand, cited several out-of-state cases in which coverage was found to exist under an ensuing-loss clause. They included Arnold v. Cincinnati Insurance Co., 276 Wis.2d 762 (2004), where the court said that an ensuing loss is one “not directly caused by faulty workmanship … but nonetheless follows as a chance, likely, or necessary consequence of the loss caused by faulty workmanship or faulty materials.”

Coverage Determination

After reviewing the parties’ authorities, Cunningham concluded that “there are at least two plausible ways” in which the ensuing-loss exception applied. One is by interpreting the damage to Moda’s inventory as the “covered cause of loss,” and Moda’s economic injury as the “resulting loss or damage caused by that covered cause of loss.”

The second approach, according to Cunningham, is to view the dirt and debris as the “covered cause of loss,” analogous to damage from rainwater in those cases upholding coverage under similar ensuing-loss clauses, such as in the Arnold case. The carpet damage then becomes the “resulting loss.”

Cunningham further opined that allowing coverage here did not conflict with Maine Townshipbecause the asbestos damage in that case, according to her, was expressly excluded, whereas the dirt and debris in the instant case was not.

She also acknowledged that the cases Travelers relied on might result in a different conclusion. But even if Travelers’ interpretation is reasonable, she said that Moda’s is also, so that the language may be ambiguous, which provides another reason to allow coverage.

The court therefore found in favor of coverage and affirmed.

Key Points

According to this court, in construing an ensuing-loss exception to a faulty-workmanship exclusion:

• The damage to other property caused by the faulty workmanship might be regarded as the “covered cause of loss,” and the economic damage to the property owner as the “resulting loss.”
• Alternatively, dirt and debris generated by the faulty workmanship may be regarded as the “covered cause of loss,” and damage to property caused by the dirt and debris as the “resulting loss.”