Ensuing Loss Clause Does Not Create Coverage For Otherwise Excluded Losses

Property insurance policies often contain exclusions with ensuing loss provisions, which state that an ensuing loss not excluded is covered. Whether a loss constitutes a covered ensuing loss is therefore frequently a critical issue in a coverage determination. In Sprague v. Safeco Insurance Company of America, 2012 Wash. LEXIS 375 (Wash. May 17, 2012)1, the Supreme Court of Washington, in an en banc decision, held that an ensuing loss provision in a property insurance policy does not create coverage for otherwise excluded losses. The court, in the majority opinion, held that the claimed loss was not covered under the policies’ ensuing loss provisions. Four justices dissented, stating that they would have found the loss to be a covered ensuing loss. Max and Krista Sprague (the “Spragues”) spent $282,000 to repair the supports, known as “fin walls,” for the three-level deck system at their home. The fin walls rotted out due to improper construction techniques that exposed the supports to the elements. It was determined that the decks were in a state of imminent collapse due to impairment of the structural integrity of the system, and that this condition existed prior to September 2003. The Spragues made a claim with their insurer, Safeco Insurance Company of America (“Safeco”), arguing that the decks were in a state of “collapse.” The pre-September 2003 Safeco policies did not define the term “collapse” or explicitly address whether “collapse” was a covered or excluded loss. The Safeco policies at issue did exclude coverage for losses caused by “smog, rust, mold, wet or dry rot,” but provided that “any ensuing loss not excluded is covered.” Another set of exclusions excluded losses caused by building defects, including defective design, construction, or materials, but also stated that “any ensuing loss not excluded is covered.” Safeco denied coverage, and the Spragues filed suit. The trial court granted Safeco’s motion for summary judgment. 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 in the policy.” The Washington Supreme Court concluded, as a number of other courts have, that an ensuing loss must be caused by a cause of loss that is separate and independent from the excluded cause of loss. It stated that the “[t]he question presented here is whether the advanced decay of the fin walls was a separate, ensuing loss that was covered under the policy despite the exclusions for rot and building defects.” (Footnote omitted.) The court concluded that it was not.

“We need not decide whether the deck had collapsed due to the loss of structural integrity even though it had not fallen to the ground. Whether or not the deck had reached a state of collapse, its condition was the result of the excluded perils of defective workmanship and rot and did not constitute a separate loss apart from those perils.” * * * * * * “Rotting wood deteriorates to the point that it loses its structure. That natural process of decay does not amount to a new or different condition. Because the homeowners’ policies here excluded coverage for both rot and defective construction, the deterioration of the fin walls was not a covered condition. We reverse the Court of Appeals and reinstate the judgment of the trial court.”

The dissenting opinion (written by one justice, and joined in by three others), disagreed, stating,

“The majority wrongly requires that there be a ‘separate’ cause of an ensuing loss, distinct from the excluded peril. Majority at 7-8. But, such a requirement would render the ensuing loss clause inoperable because the clause is implicated only when a covered loss results or ensues from an excluded peril. This presupposes causation. What the majority appears to be searching for is a physical line of demarcation.” The dissenting justices believed that “[t]he ensuing loss clause provide[d] coverage because the deck collapse ensued from the defective construction of the deck, and the policy did not exclude coverage for collapse.”

Ensuing Loss And Efficient Proximate Cause: How The Denial Letter Can Affect Litigation Position

In an opinion issued on the same date, the Supreme Court of Washington ruled in an en banc decision that collapse of a concrete slab resting on defectively designed or installed shoring was an ensuing loss. In Vision One, LLC, et al. v. Philadelphia Indem. Ins. Co., et al., 2012 Wash. LEXIS 374 (May 17, 2012)1, during construction of a condominium, the shoring underneath newly poured concrete gave way and the concrete fell onto a parking area where the wet concrete hardened. Philadelphia Indemnity denied the claim, and the denial letter indicated the basis was defective design and faulty installation of the shoring, which were excluded losses. The faulty workmanship exclusion was subject to an ensuing loss provision, but the defective design exclusion did not have an ensuing loss clause. Vision brought suit based on breach of contract, bad faith and violations of Washington’s Consumer Protection Act. The lower court determined that because the concrete, rebar, and framing were separate from the faulty shoring, damage to the concrete, rebar, and framing were resulting covered losses. The appellate court reversed, reasoning that the collapse of the shoring and concrete slab occurred simultaneously and therefore there was no ensuing loss. The Supreme Court reversed the appellate court, finding that the collapse of the slab was a covered ensuing loss, finding the situation no different than if the shoring gave way and caused a fire, where the fire damage would be covered. Id. at *23. Because there were three possible causes of the loss (defective design (excluded), faulty workmanship (excluded but subject to ensuing loss provision), and collapse (covered)), the court went on to analyze the efficient proximate cause of the loss. The court explained that if a covered loss is the efficient proximate cause, coverage is mandated. However, even if the efficient proximate cause is excluded, but there is a covered cause of loss included in the chain of causation, the efficient proximate cause rule did not mandate exclusion of the loss in this instance because Philadelphia did not cite the policy provision related to causation of an excluded loss in the denial letter, and therefore waived the provision. The court held that because Philadelphia stated in its denial letter that the loss was caused by both defective design and faulty workmanship (which was subject to the ensuing loss provision, and therefore covered), and because Philadelphia provided no evidence that the loss was caused solely by defective design, Philadelphia was locked into its causation position of concurrent causes, one of which was covered. The court also awarded Vision One attorney fees on appeal. The Sprague decision is consistent with the majority of courts across the country, which require that an ensuing loss must be caused by a separate and independent peril and/or involve separate property from the originally excluded risk. The ensuing loss decision in Vision One relies on the fact that the concrete slab was separate property from the improperly designed/installed shoring, although this decision is more difficult to reconcile given that the original cause of the loss to the slab was the excluded faulty workmanship/design defect. These cases demonstrate that application of the ensuing loss clause to a particular loss can require a careful reading of the policy language, and thorough investigation and analysis of the facts together with the case law on ensuing loss clauses. Given that the insurer in Vision One lost its appeal in large part due to the position taken in its denial letter, Vision One also reminds insurers of the importance of conducting a thorough investigation before issuing the denial letter, and having denial letters reviewed by counsel and carefully worded. 1 Reproduced by Robinson & Cole LLP with the permission of LexisNexis. Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.  All rights reserved.  No copyright is claimed as to any portion of the original work prepared by a government officer or employee as part of that person’s official duties.