Insurance companies may not automatically be off the hook when it comes to coverage for resulting damages stemming from faulty construction. In Gardens Condo v. Farmers Ins. Exch., No. 83678-1-I (Wash. Ct. App. Dec. 19, 2022), the court found that a resulting loss clause in an all-risk insurance policy may provide a condominium complex insurance coverage from damages caused to units by faulty construction of the roof. The resulting damages were covered perils and thus, potentially covered by the policy.
Gardens is a building in Shoreline, Washington, that is comprised of twenty-six condominium units. Back in 2002, Gardens found evidence of water damage to its roof fireboard and sheathing. It was determined that the water was intruding into the roof system due to a faulty design of the roof assembly, which did not include proper ventilation. The roof was redesigned by an engineer who added "2x2 sleepers" above the roof's structural joists to increase ventilation to the roof. These repairs were completed in 2004.
It was not until 2019, that Gardens discovered that the 2004 repairs were insufficient to solve the problem. The sleepers did not increase the space enough to allow adequate ventilation. The roof continued to trap water vapor and condensation formed during colder weather. The repeated exposure caused damage to the building.
Gardens filed a claim with its all-risk carrier, Farmers Insurance. The policy excluded coverage for damage that was caused by faulty design or repair. Specifically, coverage would be excluded if "the occurrence of that event directly or solely results in loss or damage, regardless of the nature of any intermediate or final event in that sequence." Faulty, inadequate, or defective, included:
- Planning, zoning, development, surveying, sitting;
- Design, specifications, workmanship, repair, construction, renovation, or remodeling, grading, compaction.
- Materials used in repair construction, renovation, or remodeling, or
- Maintenance; of part or all of any property on or off the described premises.
The policy also contained a "resulting loss" provision, which stated, "But if loss or damage by a Covered Cause of Loss results, we will pay for that resulting loss or damage."
Farmers determined that the roof damage claim was caused by lack of ventilation in the faulty assembly and subsequent repair of the roof. Given that determination, it denied coverage. Gardens argued that the damage fell under the "resulting loss" clause and preserved coverage for damage caused by a resulting covered peril, which should include the perils of humidity and condensation. Farmers continued to deny coverage stating that the faulty work "initiated a sequence of events resulting in the loss or damage" and therefore, was not covered.
Gardens filed a claim for breach of contract and declaratory relief against Farmers. Both moved for summary judgment. The trial court granted summary judgment for Farmers. It found that the insurance policy excluded coverage for faulty construction and the resulting loss clause exception did not "somehow resurrect coverage." On appeal the court reversed and remanded for further proceedings because the trial court misinterpreted the resulting loss clause in Farmers’ policy.
Standard of Review: Insurance Contracts
The language included in an insurance policy is examined de novo by the courts. Vision One LLC v. Phila. Idem. Ins. Co., 174 Wn.2d 501, 512, 276 P.3d 300 (2012). The court will look at the insurance contract as the consumer would. In effect the court gives the language a "fair, reasonable, and sensible construction." Id. Any ambiguity or gray area will be construed against the insurer as the drafter of the policy. In addition, coverage exclusions are strictly construed against the insurer because they are "contrary to the fundamental protective purpose of insurance" and the court will not extend those exclusions "beyond their clear and unequivocal meaning." State Farm Fire & Cas. Co. v. Ham & Rye, LLC, 142 Wn. App. 6, 13, 174 P.3d 1175 (2007).
How Do Resulting Loss Clauses Operate in All-Risk Insurance Policies?
The Washington Supreme Court held in Vision One,174 Wn.2d at 513-517, that under Washington law, "A resulting loss clause preserves coverage for damage caused by a covered event… that results from excluded peril." In the Vision One case, an all-risk building policy excluded coverage for faulty workmanship, but covered losses that resulted from that faulty workmanship. Specifically, the court stated that, "the all-risks policies cover all risks unless explicitly excluded, but if an exclusion has a resulting loss clause, it carves out an exception to the policy exclusion. That is, resulting loss clauses limit the scope of what is otherwise excluded under the policy." The main inquiry when looking at resulting loss clauses is whether the loss that arises due to the excluded event is covered or excluded under the policy. If the resulting loss would be excluded from the policy in any event, then there is definitively no coverage. If the resulting loss would be otherwise covered by the policy, however, then the resulting loss clause would provide coverage in that instance. Id.
Here the policy clearly excluded the initial loss for the faulty construction assembly and repair of the roof, but the resulting loss clause does cover any loss or damage caused by a covered peril; even those resulting from faulty construction. If the policy does in fact cover damage caused by the perils of condensation and excess humidity, then the policy covers any damages or losses that subsequently resulted from the faulty workmanship on the roof in this case.
The efficient proximate cause rule "mandates coverage when two or more perils combine in sequence to cause a loss, and a covered peril is the predominant or efficient cause of the loss." Vision One at 519. Farmers first urges that even if the efficient proximate cause rule applies to this case, nothing precludes an insurer from denying coverage when an excluded peril begins the casual chain of events. It argues that the court should use the "inverse efficient proximate cause rule" to determine whether the damage flowed from the faulty roof workmanship and subsequent inadequate repairs. The inverse application would apply the rule in reverse moving liability away from Farmers. MacDonald v. State Farm, 119 Wn.2d 724, 732 (wash. 1992). The court here found no valid reason to apply efficient proximate cause in reverse.
Next, Farmers argues that the resulting loss clause should only apply to unforeseen covered events, "occurring independent of the excluded peril." Farmers claims that if the court does not "restrict the resulting loss clause to non-included, unforeseen intervening events, it would swallow the faulty workmanship clause as a whole." It points to a case out of the 6th Circuit which examined the scope of a similar resulting loss exception in an insurance contract. The court in that case held that "the faulty workmanship exclusion applies to loss or damage caused by or resulting from the construction defect and damage resulting naturally and continuously from the faulty workmanship unbroken by any new, independent clause." TMW Enterprises, Inc. v. Federal Insurance, 619 F.3d 574, 579 (6th Cir. 2010). It went on to say that it "limited the resulting loss clause to later-in-time loss that flows from a non-foreseeable and non-excluded cause." Id.
Even given this decision, the Washington Supreme Court has not limited the application of a resulting loss clause to an independent, unforeseen covered peril. Vision One, 174 wn.2d at 517. Further, Farmers' contention that the resulting loss clause will nullify the exclusion does not hold water. The resulting loss clause only limits the scope of the exclusion, It does not erase it. Insurance policies generally already cover unforeseen independent perils that it does not otherwise exclude.
Based on this analysis the court determined that although the parties agreed that condensation and humidity caused the roof damage, they did not agree as to whether the insurance policy covered the perils. The trial court incorrectly characterized the implications of the all-risk insurance policy that Gardens held with Farmers. For that reason, the court reversed and remanded the case to the lower court for further proceedings.