Washington Supreme Court Rules in Favor of Builders’ Risk Insurers in Seattle Tunnel Project Coverage Dispute

In a unanimous decision, the Washington Supreme Court held in Seattle Tunnel Partners, et al v. Great Lakes Reinsurance (UK) PLC, et al. No. 100168-1 (September 15, 2022) that under the Builders Risk Policy naming both Seattle Tunnel Partners (“STP”) and the Washington Department of Transportation (“WSDOT”) as insureds that: (1) the Policy’s Mechanical Breakdown Exclusion (“MBE”) excluded coverage for property damage to the Tunnel Boring Machine (“TBM”) caused by any alleged design defects; (2) the Policy did not afford coverage for losses due to project delays; and (3) the loss of use or functionality of the tunnel did not constitute “direct physical loss, damage or destruction” covered under the Policy.

The case arose out of a major construction project in Seattle to replace the Alaskan Way Viaduct in Seattle. STP contracted with WSDOT to construct a tunnel replacing the viaduct and as part of the agreement obtained a builder’s risk all-risk insurance policy from Great Lakes Reinsurance (UK) PLC and other underwriters. The Policy had two sections, insuring two types of insured property: (Section 1) damage to the “tunneling works” defined as “the tunnel itself during the course of construction, and property being used or intended for use in the construction of the tunnel (except for the TBM); and (Section 2) Damage to the TBM.

In December 2013, after the TBM had been excavating part of the tunnel, the machine stopped working, and did not resume excavation until December 2015. The delay in tunneling was caused by the need to extract the TBM and perform repairs. STP and WSDOT tendered insurance claims to Great Lakes, which denied the claims, and this suit followed. The Supreme Court’s decision affirmed the trial court’s rulings on the parties’ motions for partial summary judgment.

The first issue addressed by the Court was whether in the event the factfinder found that a design defect in the TBM caused the TBM to stop working, the MBE applied. The MBE read: “[The insurers] will not indemnify the Insured [for] [l]oss or or [d]amage in respect of any item by its own explosion mechanical or electrical breakdown, failure breakage or derangement.” The Court first rejected STP’s argument that the MBE was ambiguous, noting that STP did not explain how any missing word or punctuation made it fairly susceptible to two different but reasonable interpretations. The Court next held that the phrase “by its own” in the MBE meant that coverage for damage to the TBM from inherent or internal causes was excluded. Finally, after a lengthy discussion of case law both inside and outside of Washington, the Court concluded that the MBE excluded coverage for machinery breakdowns resulting from an internal cause, which includes a defective design. In so concluding, the Court rejected the application of Washington’s efficient proximate cause rule because any design defect would be the initial event –an uncovered peril under the MBE.

The Court next addressed whether STP could recover its project delay losses arising out the damage to the TBM. Relying on its decision in Vision One, LLC v. Phila. Indem. Ins. Co., 174 Wn.2d 501, 276 P.3d 300 (2012), the Court rejected STP’s argument that because its delay losses would not have occurred but for the physical damage to the TBM, such losses had to be covered under an all-risk policy. Like in Vision One, the Court held that the Policy’s coverage grant for “direct physical loss, damage, or destruction” extended only to “physical” losses to covered property and that delay losses were nonphysical losses.

The Court finally addressed WSDOT’s argument that it should recover under Section 1 of the Policy for its loss of use of the tunneling works while the TBM was being repaired. WSDOT alleged that the tunneling works suffered direct physical loss or damage because the tunnel was “physically incapable of performing its essential function”: completing construction of the tunnel. The Court agreed that physical loss or damage may under certain circumstances include the physical loss of use of insured property, but that this case did not present those circumstances. Again, the Court looked to the applicable Policy language, “direct physical loss, damage or destruction,” and relying on the standard dictionary definitions of “Loss,” “Damage,” and “Physical,” the Court held that “direct physical loss [or] damage” refers to the deprivation or dispossession of or injury to the insured property and that the deprivation, dispossession, or injury must be physical, meaning that the loss must have a material existence, be tangible, or be perceptible by the senses. Because WSDOT did not allege that the tunneling works itself suffered any loss or damage that was physical, i.e. perceptible, material, or tangible, but rather that WSDOT was deprived of its use of the tunneling works due to the physical blockage of the TBM.

Disclaimer: the opinions expressed in this blog are those of the author and do not necessarily reflect those of Soha & Lang, P.S. or its clients.