Washington Supreme Court Holds Hidden Water Damage Falls Under Resulting Loss Exception To Faulty Workmanship Exclusion, Preserving Coverage

On March, 14 2024, the Washington Supreme Court held, in Gardens Condo. v. Farmers Ins. Exch., 2024 Wash. LEXIS 165 (2024), that a resulting loss exception to a faulty workmanship exclusion preserved coverage under the insured’s all-risk policy because the workmanship resulted in a covered loss.

In that case, the insured had discovered water damage to the roof of its 26-unit condominium building, caused by insufficient interior vents and design issues preventing needed ventilation. The insured had the roof assembly redesigned and repaired in attempts to increase ventilation and eliminate condensation. However, the improvements still did not provide sufficient ventilation causing the accumulation of water vapor and condensation in the space between the roof surface and ceiling. The insured sought coverage for this loss, and the insurer denied coverage under the policy’s faulty workmanship exclusion, which contained a resulting loss exception and which the Court interpreted to mean, “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.”

Relying on the holdings in Vision One LLC v. Philadelphia Indemnity Insurance Co., 174 Wn.2d 501, 276 P.3d 300 (2012), and Sprague v. Safeco Insurance Co. of America, 174 Wn.2d 524, 276 P.3d 1270 (2012), both involving faulty workmanship exclusions and resulting loss exceptions, the court held that the resulting loss exception preserved coverage because, although faulty workmanship existed, the faulty workmanship resulted in a covered loss caused by water vapor and condensation. If the insurer had desired, it could have drafted the policy differently by omitting the resulting loss exception entirely or, if included, by limiting the exception to “ensure that the entire causal chain resulting from an excluded peril would [have been] excluded.”

The Court affirmed the ruling in favor of the insured.

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

US Supreme Court Upholds Choice-Of-Law Provision in Marine Insurance Policy

In a recent opinion, Great Lakes Insurance SE v. Raiders Retreat Realty Co., LLC, the Supreme Court of the United States considered the validity of a choice-of-law provision in maritime insurance policies. Great Lakes Insurance insured Raiders Retreat Realty with a maritime insurance policy that included a choice-of-law provision which selected New York law to govern future disputes between the parties. A boat insured under the Great Lakes policy ran aground, and Great Lakes denied the claim. Great Lakes based the decision on the allegation that Raiders breached the insurance contract by failing to maintain the boat’s fire-suppression system. Under New York law, this would void the contract in its entirety.

Great Lakes filed a declaratory action to deny coverage in the Eastern District of Pennsylvania. Raiders responded making contract claims under Pennsylvania law, claiming that Pennsylvania law should be used because, as the location of the trial, it was the jurisdiction that had the most interest in the dispute. The court determined that the choice-of-law provision was enforceable under federal maritime law.

First, the court considered the initial question of whether there were already any federal maritime rules regarding whether choice-of-law provisions in maritime contracts were enforceable. The court noted that it and Courts of Appeals have enforced choice-of-law provisions in maritime contracts. The court compared the choice-of-law provisions in insurance policies to forum selection provisions, which it has upheld in maritime contracts. Ultimately, the court stated it will uphold choice-of-law provisions because they reduce legal uncertainty for the parties and discourages forum shopping.

Next, the court considered whether the choice-of-law provisions should be considered under state law. The court confirmed that there is no state law which will override a choice-of-law provision in a maritime contract. The court reiterated that there is a federal rule that governs whether choice-of-law clauses in maritime contracts are enforceable and refused to create a new rule. Further, the court noted that it will consider whether there is an equitable result when applying maritime rules. Here, the court held that its decision to uphold these clauses was equitable because it will prevent legal uncertainty to parties entering into similar agreements.

The court looked at whether there are any exceptions to this rule as it allowed some in the past. However, the court refused to create a new exception as requested by Raiders because there is no public policy interest in substituting one state’s law for another’s.

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.

Alaska Supreme Court Rules Injury Caused by Moving Inoperable Plane Arose Out of Ownership of Plane

On January 26, 2024, the Alaska Supreme Court reviewed the superior court ruling regarding an insurance policy exclusion which excluded coverage for “bodily injury… [a]rising out of … the ownership, maintenance, use, loading or unloading of… an ‘aircraft.’” The injury at issue arose when the plaintiff was pushing a 1946 Piper PA-12 airplane in 2019. The Piper had been purchased by the plaintiff’s husband in 2011 and had not flown since it failed an inspection in 2014. The plaintiff’s husband had begun to repair a fabric covering which had led to the inspection failure and had removed the plane’s wings, tail rudder, and elevators from the fuselage. The rest of the fuselage was intact, as well as many other parts of the Piper. The Piper was insured under an aircraft owner-specific policy and was registered as an aircraft with the FAA.

The issue the court reviewed was whether the plaintiff’s injury from pushing the Piper arose out of the ownership and maintenance of an “aircraft,” which would preclude coverage under the above exclusion. The court found “as USAA argues, a reasonable person would understand that the terms of the policy exclude bodily injury ‘that has a causal connection to the possession and control over (ownership [of]) an airplane.’” The court also determined that the plain language of the exclusion was clear and that it would be unreasonable to limit the exclusion to when an aircraft was fully assembled and operable. The court found that “to conclude otherwise would ignore the policy’s exclusion of coverage for bodily injury arising out of maintenance of an aircraft.” The court further held that it would be unreasonable of a lay insured to assume that the exclusion no longer applied solely because the aircraft had been partially disassembled and was no longer fully intact. The superior court’s rulings were affirmed.

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.

Western District Of Washington Holds No Coverage In Sexual Molestation Case

The Western District of Washington granted an insurer’s motion for summary judgment, holding there was no coverage for the underlying lawsuits in Am. Strategic Ins. Corp. v. Jackson, No. 3:23-cv-05461-RJB, 2024 U.S. Dist. LEXIS 17172 (W.D. Wash. Jan. 31, 2024). The underlying litigation involves a former boys’ basketball coach for Sumner High School who was alleged to have sexual molested multiple former players while they were minors. The insurer filed a declaratory action and a motion for summary judgment, seeking a declaration that there was no duty to defend nor indemnify the underlying lawsuits.

The former coach first argued that the Motion for Summary Judgment was premature, as he could not testify on his behalf without waiving Fifth Amendment rights in the criminal case. The Court held that there was no issue, as there were no “substantive grounds” as to why the testimony of the defendant was necessary to argue for coverage under the insurance policy.
The Court then moved to the substance. First, they noted that, under the policy, there was coverage for an “occurrence,” defined as “an accident.” The Court noted that the allegations in the underlying lawsuits did not allege an accident, but rather they “allege a series of intentional acts of childhood sexual abuse” by the defendant. The Court therefore held there was no “occurrence” so no coverage under the policy.

The Court also took note that multiple exclusions apply, in particular an exclusion for bodily injury that is “expected or intended by an insured,” and an exclusion for bodily injury “arising out of sexual molestation.” The Court held that each of these exclusions would independently remove coverage for the underlying lawsuits. The Court therefore granted the Motion for Summary Judgment to the insurer.

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

Washington Supreme Court Denies Insurers’ Motion to Dismiss Action Based on Forum Non Conveniens And Enjoins The Insurers From Taking Further Action in Out-Of-State Case

The Washington Supreme Court, in Pacific Lutheran Univ., et. al., v. Certain Underwriters at Lloyd’s London, 2024 Wash. LEXIS 55*, Case No. 100752-3 (2024), reviewed the trial court’s rulings for abuse of discretion in (1) denying the Insurers’ motion to dismiss the Colleges’ action, based on forum non conveniens; and (2) granting the Colleges’ motion to enjoin the Insurers from taking further action in a parallel case subsequently initiated by the Insurers in Illinois State Court, based on equitable factors. On January 18, 2024, the Supreme Court affirmed those rulings.

This action arises from an insurance coverage dispute based on losses allegedly caused by the COVID-19 pandemic. The Insurers issued “all risk” insurance policies to the Colleges through the EIIA, a nonprofit organization that provides risk management and insurance services to member institutions. The Colleges brought this action against the Insurers in their selected forum, the Pierce County Superior Court, consistent with the policies’ “suit against the company” clause (the “Washington Action”). Several months later, two of the defendant Insurers to the Washington Action commenced a parallel action against the EIIA in Illinois State Court, and subsequently joined the Colleges as defendants (the “Illinois Action”).

The Colleges moved to enjoin the Insurers from taking further action in the Illinois Action, and the Insurers moved to dismiss the Washington Action on the basis of forum non conveniens. The trial court ruled in favor of the Colleges, and the Insurers sought review by the Washington Supreme Court.

The Supreme Court held that the trial court did not abuse its discretion in electing to enforce the policies’ forum selection clause, by denying the Insurers’ motion to dismiss based on forum non conveniens. The Court explained that the common law doctrine of forum non conveniens refers to “the discretionary power of a court to decline jurisdiction when the convenience of the parties and the ends of justice would be better served if the action were brought and tried in another forum” and “unless the balance is strongly in favor of the defendant, the plaintiff’s choice of forum should rarely be disturbed.” Here, the Colleges had the contractual right under the policies to select their desired forum, all sixty plaintiff Colleges elected for the dispute to be heard in Pierce County Superior Court, and the Insurers failed to establish that the relevant private- and public-interest factors justified denying the Colleges’ contractual right. Accordingly, the Supreme Court held that the trial court properly enforced the policies’ forum selection clause and affirmed the trial court’s ruling.

The Supreme Court further held that the trial court properly issued the injunction enjoining the Insurers from taking further action in the Illinois Action, by granting the Colleges’ motion based on equitable factors. The Court explained that an injunction is an equitable remedy, and that a Washington Court may enjoin parties before it from pursuing an out-of-state action where equity clearly demands. Here, the important factors relied on by the trial court were the timing in which the actions were filed, the parallelism of the actions, and the presence of a forum selection clause that established the Colleges’ contractual right to select forum. Accordingly, the Supreme Court held that the trial court properly enjoined the Insurers to protect those interests and affirmed the trial court’s ruling.

The trial court’s rulings on the motions were affirmed.

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

Oregon Supreme Court Rules First Party Insurer Can Be Sued For Negligent Infliction of Emotional Distress

On December 29, 2023, the Oregon Supreme Court held in Moody v. Or. Cmty. Credit Union, 371 Or 692 (2023) that a first-party life insurer may be sued for negligent infliction of emotional distress by the spouse and beneficiary of the decedent. The decedent was accidentally shot and killed by a friend during a camping trip. The life insurer initially denied the claim based an exclusion for deaths “caused by or resulting from . . . being under the influence of any narcotic” because the decedent had had marijuana in his system. The decedent’s wife sued for breach of contract and negligence, arguing that the insurer negligently failed to perform a reasonable investigation before denying the claim, and that this negligence “increased emotional distress and anxiety caused by having fewer financial resources to navigate the loss of a bread-winning spouse.” The plaintiff had won in the trial court on the breach of contract claim, but the trial court dismissed the tort claims. The Oregon Court of Appeals overruled the trial court, and held that the plaintiff could bring the negligence action against the insurer under a negligence per se theory. The Oregon Supreme Court overruled the Oregon Court of Appeals on the negligence per se grounds, but held the plaintiff could still sue for negligent infliction of emotional distress.

The Oregon Supreme Court analyzed whether the plaintiff had pled sufficient facts to survive a dismissal of her negligent infliction of emotional distress claim. The Oregon Supreme Court noted that in order to allow a plaintiff to sue for emotional distress, there must be a limiting factor beyond mere foreseeability. Thus, the Oregon Supreme Court found the question of whether the plaintiff may sue for emotional distress was whether the plaintiff had a cognizable interest “as the surviving spouse of a deceased breadwinner, in having the insurance company with which she and her husband had contracted for life insurance benefits conduct a reasonable investigation of, and promptly pay, her claim for the promised benefits.”

The plaintiff argued that ORS 746.230(1), which outlines unfair claim settlement practices, was evidence of a legally protected interest. As the defendant pointed out, the Oregon Supreme Court had previously ruled in Farris v. US Fidelity and Guaranty Co., 284 Or 453 (1978) that ORS 746.230 was not intended to create a private cause of action. However, the Oregon Supreme Court noted that in Burnette v. Wahl, 284 Or 705 (1978), a statute may support a common-law claim if “it is necessary and desirable to further vindicate the right or to further enforce the duty created by statute.”

The Oregon Supreme Court notes that an insurance relationship is not merely one of payment of funds between parties, but one that provides the insured with peace of mind. In that way, the parties between an insurance contract are in “mutual expectation of service and reliance,” which is akin to doctor/patient relationship or a contractual relationship to purchase a burial plot for a loved one, both of which Oregon courts had allowed for the basis of negligent infliction of emotional distress.

The Oregon Supreme Court also held that allowing a cause of action “when a surviving spouse incurs serious emotional distress as a result of violation” of ORS 746.230 supports the purposes of that statute. In this case, the Oregon Supreme Court found that the plaintiff, having pled severe emotional distress caused by the life insurer’s negligent failure to reasonably investigate and promptly pay the policy of her breadwinning spouse, had pled sufficient facts to defeat the dismissal of negligent infliction of emotional distress.

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.

Soha & Lang, PS Files Ninth Circuit Amicus Brief on Behalf of Insurance Trade Groups

On June 6, 2023, in Gold Creek Condominium-Phase I Assn. of Apartment Owners v. State Farm Fire and Cas. Co., Ninth Circuit Case No. 22-35606, Soha & Lang, PS attorneys Paul Rosner, Sarah Davenport, and Jillian Henderson filed an amici brief on behalf of the American Property Casualty Insurance Association and the National Association of Mutual Insurance Companies. The brief addressed the trigger of coverage in a first-party property insurance claim when there are hidden damages and the policy covers loss “commencing during the policy period.” It asked the Ninth Circuit to adopt an injury-in-fact trigger theory, which would provide clarity for cases involving hidden rainwater damage – a common hazard for property in Washington.
The brief argued that, while a continuous trigger theory has been adopted by Washington courts in the context of third-party insurance, such a theory is inconsistent with the language and policies involved in first-party property claims. Unlike in third-party insurance, the brief explained, “[a] property owner’s potential loss is capped at the value of the insured property.”

The brief also argued the term “commence” is not ambiguous under Washington law, and an injury-in-fact theory is consistent with both the policy language and Washington law, as “no reasonable policyholder would answer that the loss ‘commenced’ 55 times in a single year.”

Finally, the brief offered the alternative argument for a manifestation trigger, where coverage is determined when damage becomes apparent. Such a trigger “provides a bright-line rule that creates certainty for both insureds and insurers.”

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.

Washington Court of Appeals Weighs in on Ensuing Loss

On December 19, 2022, in The Gardens Condo. v. Farmers Ins. Exch., 83678-1-I, the Washington Court of Appeals, Division One, held that the ensuing loss provision contained in an exclusion for faulty design and construction preserved coverage for resulting losses that are caused by a covered cause of loss, reversing the trial court’s summary judgment ruling in favor of Farmers and remanding for further proceedings.

The insured, Gardens Condominium, is a 26-unit condominium building in Shoreline. In 2004, Gardens had roof repairs performed to correct inadequate ventilation. In 2019, Gardens discovered the 2004 repairs were defective, and that water vapor emitted from inside the units continued to be trapped in the roof joist cavities, allowing condensation to form during cool weather and overnight temperature drops. That repeated exposure to moisture damaged the sheathing, fireboard, joists, and sleepers.

Gardens held an all-risk insurance policy from Farmers, which covered all “direct physical loss or damage” to the building not specifically excluded by the policy. The policy excludes coverage for damage caused by faulty design or repair, but the exclusion contains an ensuing loss provision, which states: “But if loss or damage by a Covered Cause of Loss results, we will pay for that resulting loss or damage.”

Farmers denied coverage because faulty construction “initiated a sequence of events resulting in the loss or damage.” Gardens objected to Farmers’ denial of coverage, contending that the resulting loss clause narrowed the faulty workmanship exclusion, preserving coverage for damage caused by a resulting covered peril, and that the policy covers the perils of humidity and condensation.

Gardens sued Farmers for breach of contract and declaratory relief. Gardens and Farmers cross-moved for summary judgment. The parties stipulated to key facts, including that the damage to the roofing assembly “was caused by condensation and/or excess humidity resulting from inadequate ventilation of the roof assembly due to the faulty, inadequate, or defective construction, repairs, and/or redesign.”

The trial court granted summary judgment for Farmers, concluding that the policy excludes coverage because faulty construction began a sequence of events that resulted in the damage, and the resulting loss clause exception did not “somehow resurrect[ ]” coverage. The Court of Appeals reversed on de novo review, finding that the trial court misinterpreted the ensuing loss provision.

Citing Vision One, 174 Wn.2d 501, 276 P.3d 300 (2012), the Court of Appeals found that the ensuing loss provision contained in the Farmers policy preserved coverage for resulting damage caused by a covered cause of loss. Thus, if the policy covers the perils of condensation and excess humidity, it covers the loss or damage from those perils. The Court of Appeals also noted that, although an ensuing loss otherwise covered by the policy remained covered, the uncovered event – in this case faulty construction – is never covered.

Relying on citing Vision One, Farmers argued that the Court should apply an “efficient proximate cause” analysis to the ensuing loss to determine whether the damage at issue flows from an excluded event, preventing coverage. The Court of appeals rejected this argument, noting that Farmers’ reference to the term “inverse efficient proximate cause” in Vision One was taken out of context and misapplied.

Farmers also argued that the ensuing loss provision should be interpreted to apply to losses from “only unforeseen covered events, occurring independent of the excluded peril”, citing TMW Enterprises, Inc. v. Federal Insurance Co., 619 F.3d 574 (6th Cir. 2010). Farmers argued that failure to do so would allow the ensuing loss provisions to “swallow the faulty workmanship exclusion whole.” The Court of Appeals rejected this argument as inconsistent with Washington law, citing Vision One, 174 Wn.2d 501, 276 P.3d 300 (2012) and Sprague v. Safeco Ins. Co. of Am., 174 Wn.2d 524, 529, 276 P.3d 1270 (2012). The Court of Appeals also noted that Farmers’ interpretation would render the ensuing loss provision superfluous.

Finally, Farmers’ argued that Gardens was not seeking coverage for an “ensuing loss”, but just for “the loss”, citing Sprague, 174 Wn.2d at 527, 276 P.3d 1270 (2012). The Court of Appeals rejected this argument, stating that, in Sprague, all the causes of the loss at issue were subject to exclusions, and thus the policy did not provide coverage under the ensuing loss provision in question. Here, the parties stipulated that the perils of condensation and excess humidity caused the roof damage, but they dispute whether Farmers’ policy covers those perils.

The Court of Appeals remanded the case for further proceedings consistent with its ruling that the ensuing loss provision contained in the exclusion for faulty design and construction preserved coverage for resulting losses that are caused by a covered cause of loss.

The Gardens Condo. v. Farmers Ins. Exch., ____ P.3d _____ (Wash. Ct. App. Dec. 19, 2022).

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.

Supreme Court Says Occurrence Policies and Non-Retroactive Claims Made and Reported Requirements Don’t Mix

Supreme Court Says Occurrence Policies and Non-Retroactive Claims Made and Reported Requirements Don’t Mix

The Washington Supreme Court has held that an occurrence-based policy endorsed with a non-retroactive claims made and reported endorsement issued to a contractor violates Washington’s public policy as expressed in RCW 18.27.050 and 18.27.140. The case arose out of the death of a subcontractor’s employee. The employee’s spouse filed a wrongful death claim against the general contractor. Preferred Contractors, the general contractor’s insurer, filed a declaratory judgment action in federal court seeking a ruling that it had no duty to defend or indemnify because the injury had occurred during one policy period, while the claim was first made during the next policy period.

The general contractor had CGL coverage from Preferred Contractors under sequential policies both at the time of death and at the time the claim was first made. The main policy form was written on an occurrence basis. But it was endorsed with a “Claims Made and Reported Limitation,” which required that the claim be first made and reported during the policy period. The endorsement is described as “non-retroactive” because no single policy ever provides coverage for injury that occurred before the policy period. In contrast, claims made policies that provide retroactive coverage cover injuries after a specified “retroactive date,” often the date that the first policy in a continuous series was purchased. The combination of the main form and the endorsement created coverage that would never apply when the injury occurred and the claim was first made in different policy periods.

The insured contractor challenged the combination of the two types of coverage, occurrence and non-retroactive claims made and reported, as violating Washington public policy. The trial court certified the question to the Washington Supreme Court, which agreed with the general contractor. It found that, by enacting RCW 18.27.050 and 18.27.140, the legislature created a public policy that contractors must be financially responsible for injuries they negligently inflict on the public. The Preferred Contractors policy violated that public policy because, by providing neither prospective nor retrospective coverage, its insureds could not have the kind of continuous coverage necessary to protect the public. The court specifically held that a contractor’s CGL policy that requires the loss to occur and be reported to the insurer in the same period and which fails to provide prospective and retroactive coverage is unenforceable.

Preferred Contractors Ins. Co., Risk Retention Grp., LLC v. Baker & Son Constr., Inc., 200 Wn.2d 128, 514 P.3d 1230 (2022).

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.

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.