Washington Supreme Court Addresses Ensuing Loss Provisions
The Washington Supreme Court recently issued two decisions addressing ensuing loss provisions involving various exclusions in first-party property insurance policies. We provide a brief analysis below concerning these important cases.
Vision One, LLC v. Philadelphia Indemnity Ins., Co. 276 P.3d 300 (Wash. 2012)
Vision One involved an “all risk” builders risk policy issued to a construction project’s owner, Vision One. During construction, a newly poured concrete floor slab collapsed apparently due to faulty shoring beneath the slab. Vision One sought coverage from its insurer, Philadelphia Indemnity, for clean-up, repair and reconstruction of the concrete floor. The policy contained an exclusion for faulty workmanship subject, however, to an exception for any resulting damage from a covered cause of loss. The policy also excluded coverage for faulty design, not subject to any resulting loss exception. Philadelphia denied coverage on the ground that the only cause of loss was defective design and faulty workmanship. The trial court found in favor of coverage, and the appellate court reversed.
The Supreme Court reversed again in favor of Vision One. It reasoned that, under the faulty workmanship exclusion’s resulting loss clause, damages resulting from faulty workmanship were covered if they were caused by a covered event. The covered event in this case, said the Court, was the peril of “collapse,” which was not excluded under the policy. “Collapse,” moreover, could be considered a covered peril, even though it might also be characterized as the loss. Since Vision One was seeking recovery for damages arising from the collapse, the policy provided coverage.
As for whether the damage may have been caused by a defective design-which exclusion contained no resulting loss exception-the Court said that Philadelphia’s denial letter did not adequately spell out that the excluded “design” cause initiated a sequence of events resulting in the loss. Rather, the letter indicated that the loss was caused by both faulty workmanship and design. The record, moreover, said the Court, did not reflect a sequence of events in any case. The Court therefore concluded that Vision One was entitled to coverage for the damages resulting from the collapse.
Sprague v. Safeco Ins. Co. of America, 276 P.3d 1270 (Wash. 2012)
In Sprague, the insured homeowners’ all-risk policy excluded coverage for losses caused by wet or dry rot, along with defective design, construction, or materials, but the exclusions also provided that “any ensuing loss not excluded is covered.” Defective construction of decking fin walls caused the fin walls to rot and eventually reach an advanced state of decay. The Spragues sought recovery of $282,000 they had paid to repair the fin walls. The trial court granted summary judgment to Safeco. The Court of Appeals reversed, concluding that the decks had collapsed and that collapse was not an excluded loss due to the ensuing loss provisions of the policy.
Once again, the Washington Supreme Court reversed, but this time in favor of the insurer. The Supreme Court held that this advanced decay of the fin walls was not a separate, ensuing loss that was covered under the policy despite the exclusions for rot and building defects. The Court reasoned that regardless of whether or not the deck had reached a state of collapse, its condition was the result of the excluded perils of defective construction and rot and did not constitute a separate loss apart from those perils. The Court commented that if there had been losses other than to the fin walls, such as an injury to a person or property damaged by the deck failure, coverage would have existed under the policy’s ensuing loss provisions. That was not the case since the only loss was to the deck system itself and this loss resulted from rot caused by defective construction (both excluded perils). Therefore, summary judgment in favor of Safeco was proper.
These two cases demonstrate that property insurers should bear the following in mind when dealing with Washington law:
(a) “Collapse” may be considered a separate peril, even though also a loss, and if not separately excluded, may give rise to coverage under an ensuing loss provision.
(b) When denying coverage under an exclusion that contains no ensuing loss exception, clearly articulate that the exclusion applies separately from any other grounds for excluding or limiting coverage and regardless of any sequence of events that may have resulted.
(c) Whether an “ensuing loss” occurred may be found to hinge on whether there was a loss other than to the property to which the excluded peril or condition (e.g., defective workmanship, rot) applies.