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).
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