Faulty Construction Exclusion and Ensuing Covered Loss Claim
The insureds filed an action against the insurer seeking a declaration that an all risk policy covered damage to the insureds' home after the insurer denied coverage based on the faulty construction exclusion. This case is Friedberg v. Chubb & Son, 691 F.3d 948 (2012).
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 covered under an all risk policy issued by Chubb. In 2006, the Friedbergs spotted a woodpecker hole in a vertical pillar and then had the house inspected for any other damage. The inspection revealed extensive water damage to the house.
The insureds reported the damage to Chubb and Chubb's adjuster concluded that defective construction had enabled water to enter the wall and beam systems. The adjuster also noted that there was a failure to install control joints which in turn caused cracking in the beams, thereby allowing water to penetrate the EIFS cladding. Chubb subsequently denied the claim citing the faulty planning, construction, or maintenance exclusion.
The Friedbergs sued and the district court ruled in favor of Chubb. The ruling was appealed.
The Friedbergs first argued that the insurance policy covers the water damage because the loss resulted from the combination of both faulty construction and the presence of water. They contended that under Minnesota's concurrent causation doctrine applied and that this supersedes the policy language. The U.S. Court of Appeals, Eighth Circuit ruled that the faulty construction of the house was the efficient and proximate cause of the loss and that but for the faulty construction, the water damage would not have taken place. Once the house was plagued with faulty construction, it was a foreseeable and natural consequence that water would enter. The court concluded that the policy language unambiguously excludes losses resulting from the named exclusion.
The insureds also argued that even if the loss was caused by faulty construction, coverage is restored by the ensuing loss clause. They contended that the damage caused by the intrusion of water into their home was an ensuing covered loss in accordance with the policy language. The appeals court said 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; furthermore, the damage due to faulty construction and resulting water intrusion are not separable and distinct perils.
The court said that the policy's general reference to ensuing loss did not create an exception to the exclusion, but rater clarifies that the exclusion ought not to be applied beyond its terms. The Friedbergs' interpretation might not entirely nullify the exclusion as it would still apply to the cost of remedying the construction defects themselves, but their broad view of the ensuing loss clause would nonetheless nearly destroy the exclusion.
The ruling of the district court was affirmed.
Editor's Note: The Circuit Court offers its interpretation of the ensuing loss clause and holds that the damage caused by the water intrusion was not a covered loss. The court held that if the clause were to be applied in this instance, this would be an unnatural reading of the exclusionary language and would, in fact, “nearly destroy” the faulty construction exclusion.