All Risk Coverage, Faulty Workmanship Exclusion, and Ensuing Losses
The insured brought an action against its insurers, alleging the insurers breached the all risk insurance policies by refusing to compensate the insured for damages resulting from water intrusion that occurred due to faulty workmanship. This case is The Bartram, LLC v. Landmark American Insurance Company, 864 F.Supp.2d 1229 (2012).
This case presents an insurance coverage dispute over damages that resulted from faulty workmanship in the construction of the Bartram Apartments. The owner of the apartments insured the property under all risk insurance policies, and all of the policies contained a coverage exclusion for faulty workmanship. Each contract also contained an ensuing loss exception that provided coverage when an excluded cause of loss results in a covered cause of loss. Both sides in this dispute agreed that the faulty workmanship exclusion applies but they do not agree about the ensuing loss exception.
The U.S. District Court noted that the burden is upon the plaintiff to establish that coverage is provided through the ensuing loss exception. Bartram contended that it has suffered losses that are separate from and the result of the faulty workmanship, thus triggering the ensuing loss exception. Specifically, Bartram claimed that water intrusion occurred because of the faulty workmanship, and the water damaged exterior and interior portions of the buildings. The plaintiff sought coverage for the water damage.
The insurers countered that an ensuing loss exception is not applicable if the ensuing loss is directly related to the original excluded risk. The insurers said that since the faulty workmanship naturally and foreseeably led to water intrusion without any new, independent cause, there was no ensuing loss and coverage is barred by the faulty workmanship exclusion.
The court decided that the policy exclusions in this case do not require reading in a proximate cause element to make sense of the policy. The was no language in the policy that would be rendered superfluous by taking it to mean that the policy excludes coverage for fixing the faulty workmanship, but the ensuing loss that resulted from water intrusion is covered. Furthermore, there was no language in the exclusion that required a break in proximate cause; to the contrary, the policies in this case plainly provide that if an excluded cause of loss results in a covered cause of loss, the insurers will pay.
Ensuing losses, said the court, are covered if they result from a covered cause of loss regardless of whether the loss was naturally set in motion by an excluded cause of loss. Given the plain meaning of the policy language, if the faulty workmanship resulted in water intrusion that subsequently resulted in ensuing losses, the cost to repair the faulty workmanship is excluded, but the ensuing losses from water intrusion are covered. The court found this interpretation to be consistent with the weight of authority interpreting the ensuing loss exception.
The plaintiff's motion for partial summary judgment was granted as to liability for ensuing losses resulting from faulty workmanship.
Editor's Note: The United States District Court for the Northern District of Florida, using Florida law, decided that ensuing losses, if they resulted from a covered cause, were covered in this instance regardless of whether the losses were naturally set in motion by an excluded cause of loss. The court separated the faulty workmanship damage and the work needed to fix this damage from the damage caused by the water intrusion. The court interpreted the policy language as clearly covering the ensuing water damage loss.