ENSUING LOSS EXCEPTION IN PROPERTY INSURANCE POLICIES

Posted on October 3, 2015October 3, 2015 by Edward Garber

Property insurance policies such as builder’s risk policies contain a design defect / faulty workmanship exclusion (as well as other exclusions for excluded risks or perils). But, certain exclusions such as the design defect / faulty workmanship exclusion may contain what is referred to as the “ensuing loss exception.” Stated differently, a design defect / faulty work is excluded from the insurance policy BUT losses ensuing (or separately resulting) from the design defect / faulty work are excepted from this exclusion and covered under the policy. If your initial reaction as to the application of the ensuing loss exception is “huh?!?,” then that exact sentiment is shared by others. Trust me!

The Florida Supreme Court decision in Swire Pacific Holdings, Inc. v. Zurich Ins. Co., 845 So.2d 161 (Fla. 2003) dealt with a design defect exclusion that read:

Loss or damage caused by fault, defect, error or omission in design, plan or specification, but this exclusion shall not apply to physical loss or damage resulting from such fault, defect, error or omission in design, plan or specification.

This initial part of this exclusion is a design defect exclusion. The underlined part is the ensuing loss exception to this exclusion.

In Swire, errors and omissions with the structural design and, therefore, structural work, of a condominium project halted the issuance of the certificate of occupancy for the condominium. The developer incurred $4.5 million to retain a new structural engineer to modify the plans as well as corrective structural work in the field. The developer then submitted a builder’s risk insurance claim. The builder’s risk insurance carrier denied coverage based on the foregoing design defect exclusion arguing that the developer incurred money to correct a design defect, but there were no covered losses or damages ensuing from the design defect. The Florida Supreme Court agreed with the builder’s risk insurer:

Swire’s [developer’s] sole claim here is an attempt to recover the expenses incurred in repairing a design defect. No ensuing loss resulted [from the design defect] to invoke the exception to the exclusionary provision…. No loss separate from, or as a result of, the design defect occurred. Therefore, we conclude…Swire is not entitled to recover the expenses associated with repairing the design defect. To hold otherwise would be to allow the ensuing loss provision to completely eviscerate and consume the design defect exclusion….This [builder’s risk insurance] contract does not operate as a warranty for faulty workmanship and should not be transformed into a guarantee against design and construction defects.

Swire, 845 So.2d at 167-68.

In a more recent case, Peek v. American Integrity Ins. Co. of Florida, 2015 WL 5616294 (Fla. 2d DCA 2015), a property insurance policy contained the following ensuing loss exception:

“We do not insure loss to property described in Coverages A and B caused by any of the following. However, any ensuing loss to property described in Coverages A and B not excluded or excepted in this policy is covered.”

Coverages A and B contained exclusions for latent defects, corrosion, faulty workmanship and pollution. Thus, the property insurance policy did not cover these items but it did cover “any ensuing loss…not excluded or excepted in this policy.”

Peek dealt with homeowners moving into a house with Chinese drywall. The homeowners contended that the Chinese drywall resulted in a noxious smell and corroded air conditioning coils. The homeowners contended that the defective drywall (exclusion) resulted in (a) the loss of use of their house due to the noxious smell and (b) damage in the form of corrosion to air conditioning coils, and that such items should be covered under the ensuing loss exception.

The Second District Court of Appeal disagreed with the homeowners regarding the application of the ensuing loss provision. The court explained:

An ensuing loss follows as a consequence of an excluded loss, and the crux of the ensuing loss provision is that there must be a covered cause of loss that ensues from the excluded cause of loss….Given that American Integrity [property insurer] proved that the Chinese drywall was an excluded defective construction material, it was the Peeks’ [homeowners] burden to demonstrate that the policy covered a loss that occurred subsequent to and as a result of that excluded peril.

First, the evidence below demonstrated that the odor present in the Peeks’ home was a manifestation of the sulfur gases emanating from the Chinese drywall and that the corrosion was caused by the chemicals released by the sulfur gases, which emanated from the Chinese drywall. As such, the losses were not “ensuing.” …

Additionally, both of the claimed ensuing losses are specifically excluded under the policy because an excluded cause of loss—defective Chinese drywall—led directly to another set of exclusions—pollution and corrosion….. Here, the damage to the Peeks’ home and consequently the odors and corrosion of metals and electronics were directly related to the defective Chinese drywall and thus directly stemmed from an excluded risk. Thus coverage was excluded under the express terms of the insurance contract.

Peeks, supra, at *4.

Recovering losses or damage under an insurance policy can be challenging in light of the various exclusions in the policy. Even the ensuing loss exception to exclusions, as demonstrated above, does not except from policy exclusions the types of losses that an insured may seek to recoup.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

PROPERTY (INCLUDING ALL-RISK) INSURANCE POLICIES AND THE EFFICIENT PROXIMATE CAUSE DOCTRINE

Posted on September 19, 2013September 19, 2013 by Edward Garber

An important new insurance coverage case came out dealing with “all risk” property insurance policies (such as homeowners or builders risk policies). The case, American Home Assurance Co. v. Sebo, 38 Fla. L. Weekly D1982a (2d DCA 2013), discusses when coverage applies when both excluded and covered perils contribute to a loss / damage. The case also discusses the application of anti-concurrent cause language in the policy. These are both important insurance coverage issues.

In this case, an owner purchased a four-year old home in 2005 and obtained an “all risk” homeowner’s property insurance policy. The policy was not a standard form policy but a manuscript policy specifically created for purposes of the house. Almost immediately after the purchase, rainwater started to intrude in numerous locations throughout the house. Then, Hurricane Wilma struck causing further damage to the house. The damage to the house was so extensive that it could not be repaired and the house had to be demolished.

The owner submitted an insurance claim to its carrier, but the carrier denied coverage except for tendering $50,000 based on language in the policy that provided for $50,000 worth of coverage for ensuing (resulting) damages caused by fungi, wet or dry rot, or bacteria. (This is often referred to as the mold exclusion and some policies allow for ensuing damages caused by mold up to a specified amount.)

The owner sued the sellers, the contractor, and the architect (arguing defective construction) and settled with each of them. The owner also sued its property insurance carrier in a declaratory action for insurance coverage.

An all risk policy, such as the policy in this case, starts out covering all risks except the numerous risks or perils that are excluded. As the Court explained:

“Property insurance is a contract between the insured and the insurer to cover property losses that are either caused by certain perils that are specifically named in the policy or are caused by “all perils” except for those specifically excluded from coverage. These perils are usually physical forces such as fire, rain, and wind.” Sebo, supra.

In this policy (like most property insurance policies), there was a faulty workmanship / design exclusion where the policy did not cover loss caused by faulty, inadequate, or defective planning, design, specifications, workmanship, repair, construction, etc.

The coverage issue in the case centered on the undisputed fact that more than one cause (excluded and covered) contributed to the owner’s loss or damage, such as faulty construction, rain, and wind. When this occurs, what legal doctrine applies to determine whether the loss is covered?

The owners wanted the legal doctrine known as the concurrent cause doctrine to apply. Under this doctrine, insurance coverage applies “when multiple perils act in concert to cause a loss, and at least one of the perils is insured and is a concurrent cause of the loss, even if not the prime or the efficient cause.” Sebo, supra. In other words, if faulty workmanship (not covered) and rain (likely covered) concurrently contribute to a loss, the loss would be covered under the concurred cause doctrine.

The insurance carrier wanted the legal doctrine known as the efficient proximate cause doctrine to apply. Under this doctrine, “the finder of fact, usually the jury, determines which peril was the most substantial or responsible factor in the loss. If the policy insures against that peril, coverage is provided. If the policy excludes that peril, there is no coverage.” Sebo, supra. In other words, if faulty workmanship (not covered) is the most substantial factor in the loss, the loss would not be covered.

The trial court applied the concurrent cause doctrine. However, on appeal, the Second District reversed finding that the efficient proximate cause doctrine should apply to determine whether coverage exists. (For more on the application of the efficient proximate cause doctrine to all-risk property insurance policies, check out this article and this article.)

The Court additionally discussed what is known as anti-concurrent cause language that exists in many insurance policies. An example of this language in the policy would be under the pollution exclusion which provided that the policy did not “cover any loss, directly or indirectly, and regardless of any cause or event contributing concurrently or in any sequence to the loss” caused by pollutants / contamination. Sebo, supra. Thus, based on this language, the concurrent cause and efficient proximate cause doctrines would be moot based on this anti-concurrent cause language. The Court dismissed this argument because the anti-concurrent cause language was not specifically incorporated into the faulty workmanship exclusion whereas it was specifically incorporated in other exclusions such as the pollution exclusion. (Importantly, other states have found this language to be unenforceable so there may be an argument as to the enforceability down the road that the Court did not delve into but noted.)

All-risk property insurance policies and named-peril policies are complicated. When a loss occurs, it is important to understand your property insurance policies in order to present claims and arguments for coverage. The Sebo case’s application of the efficient proximate cause doctrine is an important case because it is not uncommon that both weather-related issues and defective workmanship / design related issues contribute to the loss. This raises the “what came first, the chicken or the egg argument” because when this issue is tried by a jury, the insurer will likely argue that the weather-events would not have contributed to the loss if not for the defective workmanship / design so the defective workmanship / design must have been the substantial factor. Conversely, the owner will likely argue that he purchased a four-year old home and the defect issues did not surface until severe weather-related events, so the weather-related events must have been the substantial factor.