INSURANCE-RELATED COURT CASES
Digested from case reports published online
COURT DECISIONS
Must insurer pay for resulting loss exception?
The Gardens Condominium purchased an all-risk policy from Farmers Insurance Exchange in 2002. This version of the policy was in place from October 2002 to October 2004. The parties agreed that the provisions contained in the 2002 policy controlled in determining whether Gardens was entitled to the coverage it now seeks.
The policy provided coverage for loss or damage caused by a “Covered Cause of Loss.” It defined a “covered cause of loss” as any risk of direct physical loss. A loss is not covered, however, if it is caused by an excluded event. The policy further stated that damage is caused by an excluded event if that event (1) “directly or solely results in loss or damage” or (2) “initiates a sequence of events that results in loss or damage, regardless of the nature of any intermediate or final event in that sequence.” The second prong suggested that if an exclusion initiates a chain of events that cause loss or damage, the policy did not provide coverage for any losses in that chain.
The 2002 policy excluded coverage for faulty, inadequate, or defective design, specifications, workmanship, repair, construction, or renovations. This faulty workmanship exclusion, however, contained what is known as a resulting loss exception. Specifically, the policy stated, “[I]f loss or damage [is caused] by a Covered Cause of Loss results, we will pay for that resulting loss or damage.” In other words, as written, if faulty workmanship causes a covered peril to occur and that covered peril results in loss or damage, the loss or damage will be covered.
The 2002 policy also excluded damage caused by water in certain circumstances. Farmers later added exclusions for water “in any form” that remained in all subsequent versions of the policy and for damage caused by “the presence or condensation of humidity” and “moisture or vapor.”
In late 2002, Gardens found damage to the condominium building that was caused by faulty design and construction of the building’s roof. It was determined that the roof had insufficient interior vents, and the design of the rafters and joists—the structural members used in the roof’s framing—prevented needed ventilation. Because of this inadequate ventilation, water vapor condensed on the underside of the roof sheathing, causing damage. Gardens redesigned and repaired the roof assembly in 2003-2004 to increase ventilation and eliminate condensation by installing sleepers on top of the joists.
In 2019, Gardens discovered water damage to the roof’s fireboard and sheathing as well as several damaged sleepers and joists. The space that had been added between the roof surface and ceiling during the repair did not allow for sufficient ventilation. Consequently, water vapor continued to get trapped inside the space and could not ventilate. Additionally, condensation formed on the underside of the sheathing. This exposure to water vapor and condensation damaged the sheathing, fireboard, and joists.
Gardens sought coverage for the cost of repairing damage to the roof sheathing and framing caused by water vapor, condensation, and humidity. Farmers denied the claim. It concluded that faulty construction caused a lack of ventilation in the roof assembly, which caused the loss. Because faulty construction “initiated a sequence of events resulting in the loss or damage,” the damage was excluded under the faulty workmanship exclusion.
Gardens filed an action for declaratory judgment, seeking coverage for “covered hidden water damage” to the roof sheathing and framing. It moved for summary judgment, arguing that the policy covered damage caused by condensation and water vapor. Gardens argued that because the policy ordinarily covered these kinds of damages, the resulting loss exception to the faulty workmanship exclusion preserved this coverage even though the loss resulted from faulty workmanship. Gardens clarified that it wanted coverage for the damage to the fireboard and sheathing but not coverage for the cost of correcting the defective sleepers.
Farmers also moved for summary judgment, arguing that the resulting loss exception applies only if a covered event breaks the causal chain between the excluded risk and subsequent losses or if there is damage to other property. Both motions relied on the parties’ joint stipulation, which acknowledged that “faulty, inadequate, and/or defective construction, repair, and/or redesign initiated a sequence of events including inadequate ventilation, excessive humidity, and condensation that resulted in loss or damage.”
The trial court granted Farmers’ motion for summary judgment. The court found that the policy intended to exclude damage where an uncovered event—here, faulty workmanship—initiated a sequence of events that caused damage. The court stated in its ruling that the resulting loss clause only “kicks in when there’s some sort of unexpected or some kind of causal break.” Gardens appealed.
The court of appeals reversed. It reasoned that by including the resulting loss clause, Farmers agreed to pay for damage caused by a covered peril even when it resulted from faulty workmanship. Thus, if condensation and humidity were covered perils under the policy, the policy must cover damage caused by those perils. The court remanded the case to the trial court to determine if condensation was a covered peril and therefore whether the resulting loss exception applied.
Under Washington law, resulting loss exceptions preserve coverage for covered losses when an exclusion otherwise would have removed it. Courts determine whether a policy covers loss or damage by characterizing the perils contributing to the loss, and determining which perils the policy covers and which it excludes. An all-risk policy may bar coverage when an excluded peril causes damage; a resulting loss clause, however, carves out an exception to the exclusion.
Resulting loss clauses preserve coverage for loss that ensues after an excluded event if it would otherwise be covered by the policy. The excluded event itself, however, is never covered.
The parties agreed that faulty workmanship existed here: failure to add enough space for adequate ventilation in the roof redesign and repair. This faulty workmanship resulted in potentially covered perils (condensation and water vapor) that caused loss (water-related damage to other parts of the roof). If condensation and water vapor are new and distinct perils and the loss to the roof components (other than those defectively constructed) is a separate ensuing loss, the policy provides coverage, assuming that condensation and water vapor are also covered perils.
Farmers argued that the resulting loss exception did not apply to natural consequences of an excluded peril and relatedly that condensation was not a new peril because it was the “natural and unavoidable byproduct of the faulty lack of ventilation.”
According to the court, Farmers relied on a previous case but misunderstood the court’s reasoning. In that case, the court said it did not hold that a resulting loss is not covered if it is a natural consequence of an excluded peril. Instead, the court considered whether rot was the same condition as collapse to determine if the rot exclusion applied.
The court’s reasoning was specific, and its discussion of the “natural process” of deterioration was describing whether the advanced state of decay of the fin walls was the same peril as rot. The court did not discuss whether collapse was a natural and unavoidable byproduct of faulty workmanship.
Farmers’ argument that the natural consequences of an excluded peril were not covered was contrary to the conclusion in the court’s finding in the second previous case and would negate the effect of the resulting loss clause. Collapse caused by instability is the very loss that proper installation of shoring is intended to prevent. If natural consequences were not covered, the court said, it would have found no coverage in the second previous case.
Also, courts should not read additional language into a policy. Adopting Farmers’ reasoning, the court said, would do exactly that. The resulting loss exception to the faulty workmanship exclusion stated that Farmers will pay for loss or damage caused by a covered cause of loss resulting from faulty workmanship. It did not state that the covered cause of loss must be independent from the faulty workmanship or that it cannot be a natural consequence of faulty workmanship.
Because the language of the exception is clear, the court said it would not rewrite it by adding requirements. Consistent with the court’s principles of interpretation, exclusions are strictly construed against the insurer. Thus, the court concluded that a resulting loss exception must have effect to preserve coverage for loss that results from covered perils regardless of whether the peril is the natural consequence of an excluded peril.
The court held that the resulting loss exception to the faulty workmanship exclusion revived coverage even if the faulty workmanship exclusion would otherwise deny it. The court affirmed the court of appeals and remanded the case to the trial court for further proceedings consistent with this opinion.
The Gardens Condominium v. Farmers Insurance Exchange—Supreme Court of the State of Washington—No. 101892-4—March 14, 2024.
