Faulty Construction Exclusion
October 16, 2012
The insureds sought coverage for damage sustained to their home under a policy that covered “all risk of physical loss”. The insurer denied coverage based on an exclusion that applied to loss due to faulty planning, construction, or maintenance. This case is Friedberg v. Chubb & Son, Inc., 2012 WL 3870575.
The Friedbergs' house was built in 1989 and the exterior of the home was coated with an Exterior Insulation Finish System (EIFS). The house was insured under Chubb's Masterpiece policy that covered all risk of physical loss, unless stated otherwise or an exclusion applies. A physical investigation of the house in 2006, revealed extensive water damage. The Friedbergs notified Chubb of the loss and an adjuster concluded that defective construction had enabled water to enter the wall and beam systems. The damage was attributed to a failure to install control joints and the adjuster said this failure caused cracking in the beams, thereby allowing water to penetrate the EIFS cladding. The adjuster noted that the damage had accumulated steadily over the course of several years.
The insurer rejected the claim and cited several exclusions on the policy, especially the one pertaining to loss due to faulty planning, construction, or maintenance. The insured filed a lawsuit seeking coverage, but the district court found in favor of Chubb, ruling that the water damage was caused by faulty construction and therefore excluded under the terms of the policy. This appeal followed.
The United States Court of Appeals, Eighth Circuit, noted that Friedbergs' argument that the policy covered the water damage because the loss resulted from the combination of both faulty construction and the presence of water. The insureds contended that under Minnesota's concurrent causation doctrine, when a loss results from both a covered peril and an excluded peril, coverage exists unless the excluded peril is the overriding cause of the loss. The Friedbergs contended that the concurrent causation doctrine supersedes the policy language. The court, however, decided that the faulty construction was the efficient and proximate cause of the loss; but for the faulty construction, the water damage would not have taken place. The court said that although water intrusion played an essential role in the damage to the house, it was not an independent and efficient cause of the loss. The exclusion applied.
The Friedbergs also asserted that even if the loss was caused by faulty construction, coverage was restored by the ensuing loss clause that declared that the policy does insure ensuing covered loss unless another exclusion applies. The insureds said that the damage caused by the intrusion of water into the house was an ensuing covered loss. The court held that under Minnesota law, the ensuing loss provision excludes from coverage the normal results of defective construction, and applies only to distinct, separable, ensuing losses. The court held that the Friedbergs' reading of the ensuing loss clause would dramatically limit the policy's faulty construction exclusion because almost any loss caused by faulty construction could also be characterized as an ensuing loss under an all risk policy. In other words, the exclusion would be nearly destroyed.
The judgment of the district court was affirmed.
Editor's Note: Faulty construction exclusions followed by ensuing loss language often causes confusion and coverage disputes for insureds and insurers. In this instance, the appeals court found that the damage to the house was ultimately caused by faulty construction and if the ensuing loss language were to be interpreted as the insureds wanted, the exclusion would be nullified. This would be an “unnatural reading of the language” according to the court.