How Do You Know When Your Loss Ensues?

An ensuing loss provision is an exception to an exclusion in a first-party property policy that applies where the damage caused by an excluded peril operates as a link in the “chain of events” that enables a covered peril to damage other property. See IRMI Glossary of Insurance and Management Terms, http://bit.ly/1aPLMLA. The effect of the provision is that ensuing losses stemming from uncovered events will be covered, as long as such losses would otherwise be covered under the policy. Consequently, an understanding of the provision is vital to commercial property landlords and tenants.

Ensuing loss provisions are found in all risk policies, including commercial first-party property policies and builder's risk policies. See Acme Galvanizing Co. v. Fireman's Fund Ins. Co., 221 Cal. App. 3d 170 (Cal. App. 1st Dist. 1990) (commercial first party); Wal-Mart Stores, Inc. v. Gulf Ins. Co., 2005 U.S. Dist. Lexis 46592 (D. Or. 2005) (commercial first party), aff'd, 250 Fed. Appx. 221 (9th Cir. 2007); Alton Ochsner Med. Found. v. Broadmoor Constr., 219 F.3d 501 (5th Cir. La. 2000) (builder's risk); and Laquila Constr., Inc. v. Travelers Indem. Co. of Illinois, 66 F. Supp. 2d 543 (S.D.N.Y. 1999) (builder's risk).

This article provides an overall review of ensuing loss provisions and their application by courts across the United States. Judicial interpretation of ensuing loss provisions is not consistent and is highly fact-intensive. An example of an ensuing loss is a water leak that causes an electrical short, which starts a fire. “The damage caused by the fire is a covered ensuing loss because it is an unforeseeable event occurring 'wholly separate from the defective property itself,' and, but for the excluded peril, would otherwise be a covered loss.” Prudential Prop. & Cas. Ins. Co. v. Lillard-Roberts, 2002 U.S. Dist. LEXIS 20384 (D. Or. 2002), quoting Swire Pac. Holdings, Inc. v. Zurich Ins. Co., 139 F. Supp. 2d 1374, 1380 (S.D. Fla. 2001).

All-Risk Policies

In order to understand how ensuing loss provisions are applied, it is important to understand the policies in which they are contained. All-risk policies generally insure “risks of direct physical loss” to property insured, except as otherwise excluded or limited or unless the loss is due to an internal characteristic of the property rather than an external force. In other words, it is “a special type of insurance extending to risks not usually contemplated, and generally allows recovery for all fortuitous losses, unless the policy contains a specific exclusion expressly excluding the loss from coverage.” See Coverage Under All-Risk Insurance, 30 A.L.R.5th 170 (May 2005). See also Yale Univ. v. CIGNA Ins. Co., 224 F. Supp. 2d 402 (D. Conn. 2002).

In order to establish a prima facie case for recovery under an all-risk policy, an insured must prove the existence of an all-risk policy, an insurable interest and the fortuitous loss of covered property. Generally, the insured is obligated merely to prove that a fortuitous loss occurred, not the details and exact cause. See, e.g., Int'l Multifoods Corp. v. Commercial Union Ins. Co., 309 F.3d 76 (2d Cir. N.Y. 2002); and 80 Broad Street Co. v. United States Fire Ins. Co., 389 N.Y.S.2d 214 (N.Y. Sup. Ct. 1975), aff'd, 390 N.Y.S.2d 768 (1st Dep't 1976). The insured bears the initial burden of demonstrating that it has suffered a fortuitous physical loss of or damage to a covered property and, if the insured sustains this burden, the burden then shifts to the insurer to demonstrate that the claimed losses are otherwise excluded from coverage. See Montefiore Med. Ctr. v. Am. Protection Ins. Co., 226 F. Supp. 2d 470, 477 (S.D.N.Y. 2002); and University of Cincinnati v. Arkwright Mut. Ins. Co. 1993 U.S. Dist. LEXIS 17126 (S.D. Ohio 1993).

For the purpose of this article, it is assumed that the insured has established that a covered all-risk loss has occurred, and that the insurer has established that an exclusion in the policy is applicable to the claim. What happens next is the focus of this article.

Origins of Ensuing Loss Provisions

As explained in the following excerpt from the IRMI Glossary of Insurance and Management terms, www.IRMI.com, the origins of the ensuing loss provision arose from the aftermath of the 1906 earthquake and resulting fire in San Francisco:

Ensuing loss clauses were developed after the San Francisco earthquake of 1906. Earth movement caused about $80 million in property damage. Gas emitted from pipes broken during the shaking sparked a fire, which spread to the rest of the city and caused another $400 million in other property damage (in 1906 dollars). ' Insurers argued that under the ordinary “proximate cause” rule, the earth movement was the peril that set the “chain of events in motion,” and that because earth movement was excluded,the fire damage was excluded, too. After the San Francisco earthquake, the California legislature enacted a set of statutes to prevent insurers from disclaiming coverage for fires ensuing from earthquakes. To comply with these and similar statutes in other states, first-party insurers added exceptions to their earthquake exclusions preserving coverage for ensuing fires. Later, ensuing loss exceptions were incorporated into many other types of exclusions.

See http://bit.ly/1aPLMLA. See also Estate of Konell v. Allied Prop. & Cas. Ins. Co., 2013 U.S. Dist. LEXIS 101081 (D. Or. 2013). Today, variations of ensuing loss provisions are commonly contained in an “all-risk” policy.

Policy Wording

While ensuing loss provisions are contained in nearly every all-risk policy, the policy wording varies greatly. For example, some provisions will cover “loss not otherwise excluded,” as follows:

VI. EXCLUSIONS ' This policy does not insure under this form against:

***

E. Loss caused by:

1. wear and tear, deterioration, ' unless loss by a peril not otherwise excluded ensues and then the Company shall be liable for only such ensuing loss .

(Emphasis added.)

An example of an ensuing loss provision, which requires that the ensuing loss result from a covered cause of loss, is set forth below:

3. We will not pay for loss or damage caused by or resulting from any of the following, 3.a. through 3.c. But if an excluded cause of loss that is listed in 3.a. through 3.c. results in a Covered Cause of Loss, we will pay for the loss or damage caused by that Covered Cause of Loss.

***

Some policies require that the ensuing loss results from a specified peril, as follows:

2. We will not pay for loss or damage caused by or resulting from any of the following.

***

d.(1)Wear and tear;

***

If an excluded cause of loss that is listed in 2.d.(1) through (7) results in a “specified cause of loss,” “accident,” or building glass breakage, we will pay for the loss or damage caused by that “specified cause of loss,” “accident” or building glass breakage.

“Ensuing loss” is not generally defined in insurance policies, and the interpretation of ensuing loss provisions by the courts is dependent upon the specific policy wording, the pertinent facts, general principles of contract interpretation and the venue of the lawsuit. For example, in KAAPA Ethanol, LLC v. Affiliated FM Ins. Co., 660 F.3d 299, 302 n.1 (8th Cir. Neb. 2011), the Eighth Circuit defined an ensuing loss provision as “provid[ing] coverage when an excluded peril leads to loss from an 'independent' non-excluded peril.”

General Principles

The issue of whether there could be a covered ensuing loss under the wording of an exclusion is a highly litigated one. The Washington Supreme Court in McDonald v. State Farm Fire & Casualty Co., 119 Wn.2d 724, 734 (Wash. 1992) explained the purpose of the ensuing loss provision, which provisions have been the subject of much litigation:

The ensuing loss clause may be confusing, but it is not ambiguous. Reasonably interpreted, the ensuing loss clause says that if one of the specified uncovered events takes place, any ensuing loss which is otherwise covered by the policy will remain open. The uncovered event itself, however, is never covered … [T]he intent of the ensuing loss clause is not to enlarge the list of items covered under the policy. [citation omitted]

As recognized in McDonald v. State Farm Fire & Casualty Co., and by the great weight of cases nationwide, the resulting or ensuing loss would generally be covered if it arose from a separate, independent, but covered peril resulting from the original excluded peril. The uncovered peril would never be covered, or else the exception, i.e., the ensuing loss, would swallow the exclusion. See Platek v. Town of Hamburg, 24 N.Y.3d 688 (N.Y. 2015) (reversing lower court decision and granting insurer's motion for summary judgment, holding that insurer did not err in denying claim that fell within water loss exclusion with an ensuing loss provision because, among other things, such provision was not intended to resurrect coverage for the excluded peril, and permitting coverage would contravene the exclusion's purpose to preclude coverage for damages caused by the entry of water onto an insured's property); See also Acme Galvanizing Co. v. Fireman's Fund Ins. Co., 221 Cal. App. 3d 170 (Cal. App. 1st Dist. 1990); Wal-Mart Stores, Inc. v. Gulf Ins. Co., 2005 U.S. Dist. Lexis 46592 (D. Or. 2005), aff'd, 250 Fed. Appx. 221 (9th Cir. 2007); Friedberg v. Chubb & Son, Inc., 691 F.3d 948 (8th Cir. Minn. 2012); Alton Ochsner Med. Found. v. Allendale Mut. Ins. Co., 219 F. 3d 501 (5th Cir. La. 2000); Bettigole v. American Employers Ins. Co., 30 Mass. App. Ct. 272 (Mass. App. Ct. 1991); Cooper v. Am. Family Mut. Ins. Co., 184 F. Supp. 2d 960 (D. Ariz. 2002); Montefiore Med. Ctr. v. Am. Protection Ins. Co., 226 F. Supp. 2d 470, 477 (S.D.N.Y. 2002); and GTE Corp. v. Allendale Mut. Ins. Co., 372 F.3d 598 (3d Cir. N.J. 2004).

There are decisions where some courts carefully parse components of a loss involving an excluded peril to find ensuing damage from a covered peril. See, e.g., Boardwalk Condo Ass'n v. Travelers Indem. Co , 2007 U.S. Dist. LEXIS 48325 (S.D. Cal. 2007); Phillips v. United Servs. Auto. Ass'n , 146 S.W.3d 629 (Tenn. Ct. App. 2004) (the insured's house was damaged by water penetrating the stucco due to faulty workmanship, and the insured argued that it was not seeking coverage for faulty workmanship, but coverage for the ensuing loss; the court held that rot, though an excluded cause, was covered by ensuing loss provision as water damage and rot are separate perils); Blaine Constr. Corp. v. Insurance Co. of N. Am., 171 F.3d 343 (6th Cir. Tenn. 1999) (holding that water damage due to faulty workmanship was a covered ensuing loss); and Spiniello Cos. v. Hartford Fire Ins. Co., 2008 U.S. Dist. LEXIS 95009 (D.N.J. 2008) (policy wording did not require another covered peril to trigger coverage). The majority of cases recognize that there must be a separate, distinct event caused by a separate peril.

It is also important to note that an ensuing loss would not be covered if it is separately excluded by another exclusion in the policy. See, e.g., Sprague v. Safeco Ins. Co. of Am., 174 Wn.2d 524, 529 (Wash. 2012) (losses caused by the excluded peril will be covered unless the ensuing loss is also specifically excluded); and Vision One, LLC v. Phila. Indem. Ins. Co., 174 Wn.2d 501 (Wash. 2012) (issue as to whether the ensuing clause of one exclusion applied where there were two excluded events and only one exclusion contained an ensuing loss provision).

In sum, while the rule appears simple, there have been strong divergences in opinion in the courts, even among decisions from the same state, as to what is considered an ensuing loss, and whether it is covered or excluded. There have been some thoughtful decisions in recent years indicating that if the ensuing damage occurs as a result of an excluded peril, there is no coverage; however, there are a few decisions that suggest a result-oriented approach. The result often depends on the particular wording of the ensuing loss provision and the judge rendering the decision. There are policies that simply provide coverage for ensuing damage or ensuing damage from a covered peril as opposed to policies that provide coverage for ensuing damage not precluded in the policy.

Courts have also utilized the efficient proximate cause analysis in determining the applicability of policy exclusions containing ensuing loss provisions. See, e.g., Puhlovsky v. Rutgers Cas. Ins. Co., 2012 N.J. Super. Unpub. LEXIS 2091 (App. Div. 2012); Lakes' Byron Store, Inc. v. Auto-Owners Ins. Co., 589 N.W.2d 608 (S.D. 1999) (upholding a power failure exclusion to bar a claim by the owner of a hunting lodge for food spoilage and business interruption loss as a result of a power outage caused by a snow and ice storm), and Vision One, LLC v. Phila. Indem. Ins. Co., 174 Wn.2d 501 (Wash. 2012).

Specific Exclusions

We address below, and in an upcoming issue, cases interpreting ensuing loss provisions in various common areas of law, generally corresponding to the specific type of exclusion at issue.

Faulty Workmanship

Judicial construction of the ensuing loss provision frequently occurs in the context of the exclusion for faulty workmanship. The Minnesota case of Friedberg v. Chubb & Son, Inc., 691 F.3d 948, 953 (8th Cir. Minn. 2012) ruled that the ensuing loss provision may not be used to circumvent an exclusion that “'exclude[s] from coverage the normal results' of defective construction, and applies only to 'distinct, separable, ensuing losses.'” (quoting Sentinel Mgmt. Co. v. N.H. Ins. Co., 563 N.W.2d 296, 302 (Minn. Ct. App. 1997). The court upheld the denial of coverage for gradual and extensive water damage over a period of time to the insureds' house resulting from defective construction that had enabled water to enter the wall and beams. The insureds argued that the ensuing loss provision removed their loss from the application of the construction defect exclusion. However, the lower court rejected the insureds' argument that the ensuing loss provision applied, analogizing it to another case where the court ruled that “[t]he loss resulted from water that entered due to construction defects, and therefore the water intrusion and resulting loss were 'a single phenomenon … [t]here was no intervening cause other than time.'” Friedberg v. Chubb & Son, Inc ., 832 F. Supp. 2d 1049, 1059 (D. Minn. 2011). There was “no separable and distinct peril” that led to the damage. The court concluded that the faulty construction of the insureds' home was the efficient and proximate cause of the loss. Once the house was plagued with faulty construction, it was a foreseeable and natural consequence that the water would enter. Although water intrusion played an essential role in the damage to the house, it was not an independent and efficient cause of the loss.

Wal-Mart Stores, Inc. v. Gulf Ins. Co., 2005 U.S. Dist. Lexis 46592 (D. Or. 2005), aff'd, 250 Fed. Appx. 221 (9th Cir. 2007) also illustrates how an ensuing loss provision is applied in the context of a construction defect. In Wal-Mart, the concrete floor in the insured's distribution center began curling, which the insured alleged made it dangerous to use the floors, caused damage to the wheels of the forklifts, requiring additional maintenance, and caused the edges of the slabs to break down. The insurers asserted that the insured's loss was caused by faulty design and/or workmanship, and denied coverage. The court found that the cost of replacing the defective specifications, as agreed by the parties, was excluded, and also held that the costs associated with repairing and replacing the concrete floors and associated structures are directly related to and a part of the faulty construction caused by the defective specifications. The court found that at least a portion of the related damages pertained to the cost of additional maintenance to the wheels of the insured's forklifts damaged by the curling of the defective concrete floor, and this type of related damage was a loss that is separate and independent from the defective specification and is recoverable under the policies.

In Laquila Construction, Inc. v. Travelers Indemnity Company of Illinois, 66 F. Supp. 2d 543 (S.D.N.Y. 1999), aff'd memo, 216 F.3d 1072 (2d Cir. N.Y. 2000), the insured contracted with a construction company to provide concrete for its construction of a new building. The contract required the concrete to be a certain minimum strength. The strength of the concrete was discovered to be below “specification.” The defective concrete was replaced using a process, which required “shoring” of the building, and the HVAC ductwork, electrical fixtures, and plumbing units had to be removed and reinstalled. The insured submitted the loss to its insurer requesting coverage for the defective concrete, as well as costs for shoring, removing and reinstalling the above items. The insurer denied the claim on the basis that the plaintiff was seeking the costs of making good faulty or defective workmanship or material.

The court found that the insured's claim fell “squarely into the exclusion clause simply as a cost incurred to make good the defective concrete.” In doing so, the court rejected the insured's argument that the mere incorporation of the defective slab into the building caused the building, as a whole, property damage. The ensuing loss provision did not cover the costs of reinforcing the building and removing and reinstalling other building components while the defective concrete was replaced. The defective concrete caused no damage to any other portion of the structure, other persons or property. The sole claim was for the cost of correcting the deficiencies in the wall. Had the wall, as a result of the deficiencies in the concrete, collapsed and caused damage to some other portion of the work, or to equipment of a subcontractor or some similar thing, the court noted it would be a different case.

The court added that “Laquila's claim for coverage here is no more than an attempt to recover for the excluded costs of making good its faulty or defective workmanship ' [w]ere I to accept the plaintiff's interpretation, it would result in coverage for nearly every instance of defective workmanship ' be it the installation of cracked pipes, faulty electrical wiring, or a defective ventilation system ' whether or not there was any actual ensuing loss or if such loss stemmed directly from a risk expressly and unquestionably excluded by the policy.” Thus, the court found no damage separate and apart from the defective concrete, and no coverage under the ensuing loss provision for the access costs.

This discussion continues in an upcoming issue.

Benjamin Fleischner is a Partner, and Ann Marie Petrey is Of Counsel at White Fleischner & Fino LLP, resident in the Holmdale, NJ, office. Eric Leibowitz is an Associate, resident in the firm's New York office. Please note that this article is written for educational purposes only and does not constitute legal advice or reflect any advice given by White Fleischner & Fino LLP to its clients or the views and opinions of any clients of the firm.

An ensuing loss provision is an exception to an exclusion in a first-party property policy that applies where the damage caused by an excluded peril operates as a link in the “chain of events” that enables a covered peril to damage other property. See IRMI Glossary of Insurance and Management Terms, http://bit.ly/1aPLMLA. The effect of the provision is that ensuing losses stemming from uncovered events will be covered, as long as such losses would otherwise be covered under the policy. Consequently, an understanding of the provision is vital to commercial property landlords and tenants.

Ensuing loss provisions are found in all risk policies, including commercial first-party property policies and builder's risk policies. See Acme Galvanizing Co. v. Fireman ' s Fund Ins. Co. , 221 Cal. App. 3d 170 (Cal. App. 1st Dist. 1990) (commercial first party); Wal-Mart Stores, Inc. v. Gulf Ins. Co., 2005 U.S. Dist. Lexis 46592 (D. Or. 2005) (commercial first party), aff'd, 250 Fed. Appx. 221 (9th Cir. 2007); Alton Ochsner Med. Found. v. Broadmoor Constr. , 219 F.3d 501 (5th Cir. La. 2000) (builder's risk); and Laquila Constr., Inc. v. Travelers Indem. Co. of Illinois , 66 F. Supp. 2d 543 (S.D.N.Y. 1999) (builder's risk).

This article provides an overall review of ensuing loss provisions and their application by courts across the United States. Judicial interpretation of ensuing loss provisions is not consistent and is highly fact-intensive. An example of an ensuing loss is a water leak that causes an electrical short, which starts a fire. “The damage caused by the fire is a covered ensuing loss because it is an unforeseeable event occurring 'wholly separate from the defective property itself,' and, but for the excluded peril, would otherwise be a covered loss.” Prudential Prop. & Cas. Ins. Co. v. Lillard-Roberts, 2002 U.S. Dist. LEXIS 20384 (D. Or. 2002), quoting Swire Pac. Holdings, Inc. v. Zurich Ins. Co. , 139 F. Supp. 2d 1374, 1380 (S.D. Fla. 2001).

All-Risk Policies

In order to understand how ensuing loss provisions are applied, it is important to understand the policies in which they are contained. All-risk policies generally insure “risks of direct physical loss” to property insured, except as otherwise excluded or limited or unless the loss is due to an internal characteristic of the property rather than an external force. In other words, it is “a special type of insurance extending to risks not usually contemplated, and generally allows recovery for all fortuitous losses, unless the policy contains a specific exclusion expressly excluding the loss from coverage.” See Coverage Under All-Risk Insurance, 30 A.L.R.5th 170 (May 2005). See also Yale Univ. v. CIGNA Ins. Co. , 224 F. Supp. 2d 402 (D. Conn. 2002).

In order to establish a prima facie case for recovery under an all-risk policy, an insured must prove the existence of an all-risk policy, an insurable interest and the fortuitous loss of covered property. Generally, the insured is obligated merely to prove that a fortuitous loss occurred, not the details and exact cause. See, e.g., Int'l Multifoods Corp. v. Commercial Union Ins. Co. , 309 F.3d 76 (2d Cir. N.Y. 2002); and 80 Broad Street Co. v. United States Fire Ins. Co. , 389 N.Y.S.2d 214 (N.Y. Sup. Ct. 1975), aff'd, 390 N.Y.S.2d 768 (1st Dep't 1976). The insured bears the initial burden of demonstrating that it has suffered a fortuitous physical loss of or damage to a covered property and, if the insured sustains this burden, the burden then shifts to the insurer to demonstrate that the claimed losses are otherwise excluded from coverage. See Montefiore Med. Ctr. v. Am. Protection Ins. Co. , 226 F. Supp. 2d 470, 477 (S.D.N.Y. 2002); and University of Cincinnati v. Arkwright Mut. Ins. Co. 1993 U.S. Dist. LEXIS 17126 (S.D. Ohio 1993).

For the purpose of this article, it is assumed that the insured has established that a covered all-risk loss has occurred, and that the insurer has established that an exclusion in the policy is applicable to the claim. What happens next is the focus of this article.

Origins of Ensuing Loss Provisions

As explained in the following excerpt from the IRMI Glossary of Insurance and Management terms, www.IRMI.com, the origins of the ensuing loss provision arose from the aftermath of the 1906 earthquake and resulting fire in San Francisco:

Ensuing loss clauses were developed after the San Francisco earthquake of 1906. Earth movement caused about $80 million in property damage. Gas emitted from pipes broken during the shaking sparked a fire, which spread to the rest of the city and caused another $400 million in other property damage (in 1906 dollars). ' Insurers argued that under the ordinary “proximate cause” rule, the earth movement was the peril that set the “chain of events in motion,” and that because earth movement was excluded,the fire damage was excluded, too. After the San Francisco earthquake, the California legislature enacted a set of statutes to prevent insurers from disclaiming coverage for fires ensuing from earthquakes. To comply with these and similar statutes in other states, first-party insurers added exceptions to their earthquake exclusions preserving coverage for ensuing fires. Later, ensuing loss exceptions were incorporated into many other types of exclusions.

See http://bit.ly/1aPLMLA. See also Estate of Konell v. Allied Prop. & Cas. Ins. Co., 2013 U.S. Dist. LEXIS 101081 (D. Or. 2013). Today, variations of ensuing loss provisions are commonly contained in an “all-risk” policy.

Policy Wording

While ensuing loss provisions are contained in nearly every all-risk policy, the policy wording varies greatly. For example, some provisions will cover “loss not otherwise excluded,” as follows:

VI. EXCLUSIONS ' This policy does not insure under this form against:

***

E. Loss caused by:

1. wear and tear, deterioration, ' unless loss by a peril not otherwise excluded ensues and then the Company shall be liable for only such ensuing loss .

(Emphasis added.)

An example of an ensuing loss provision, which requires that the ensuing loss result from a covered cause of loss, is set forth below:

3. We will not pay for loss or damage caused by or resulting from any of the following, 3.a. through 3.c. But if an excluded cause of loss that is listed in 3.a. through 3.c. results in a Covered Cause of Loss, we will pay for the loss or damage caused by that Covered Cause of Loss.

***

Some policies require that the ensuing loss results from a specified peril, as follows:

2. We will not pay for loss or damage caused by or resulting from any of the following.

***

d.(1)Wear and tear;

***

If an excluded cause of loss that is listed in 2.d.(1) through (7) results in a “specified cause of loss,” “accident,” or building glass breakage, we will pay for the loss or damage caused by that “specified cause of loss,” “accident” or building glass breakage.

“Ensuing loss” is not generally defined in insurance policies, and the interpretation of ensuing loss provisions by the courts is dependent upon the specific policy wording, the pertinent facts, general principles of contract interpretation and the venue of the lawsuit. For example, in KAAPA Ethanol, LLC v. Affiliated FM Ins. Co. , 660 F.3d 299, 302 n.1 (8th Cir. Neb. 2011), the Eighth Circuit defined an ensuing loss provision as “provid[ing] coverage when an excluded peril leads to loss from an 'independent' non-excluded peril.”

General Principles

The issue of whether there could be a covered ensuing loss under the wording of an exclusion is a highly litigated one. The Washington Supreme Court in McDonald v. State Farm Fire & Casualty Co. , 119 Wn.2d 724, 734 (Wash. 1992) explained the purpose of the ensuing loss provision, which provisions have been the subject of much litigation:

The ensuing loss clause may be confusing, but it is not ambiguous. Reasonably interpreted, the ensuing loss clause says that if one of the specified uncovered events takes place, any ensuing loss which is otherwise covered by the policy will remain open. The uncovered event itself, however, is never covered … [T]he intent of the ensuing loss clause is not to enlarge the list of items covered under the policy. [citation omitted]

As recognized in McDonald v. State Farm Fire & Casualty Co., and by the great weight of cases nationwide, the resulting or ensuing loss would generally be covered if it arose from a separate, independent, but covered peril resulting from the original excluded peril. The uncovered peril would never be covered, or else the exception, i.e., the ensuing loss, would swallow the exclusion. See Platek v. Town of Hamburg , 24 N.Y.3d 688 (N.Y. 2015) (reversing lower court decision and granting insurer's motion for summary judgment, holding that insurer did not err in denying claim that fell within water loss exclusion with an ensuing loss provision because, among other things, such provision was not intended to resurrect coverage for the excluded peril, and permitting coverage would contravene the exclusion's purpose to preclude coverage for damages caused by the entry of water onto an insured's property); See also Acme Galvanizing Co. v. Fireman ' s Fund Ins. Co. , 221 Cal. App. 3d 170 (Cal. App. 1st Dist. 1990); Wal-Mart Stores, Inc. v. Gulf Ins. Co., 2005 U.S. Dist. Lexis 46592 (D. Or. 2005), aff'd, 250 Fed. Appx. 221 (9th Cir. 2007); Friedberg v. Chubb & Son, Inc. , 691 F.3d 948 (8th Cir. Minn. 2012); Alton Ochsner Med. Found. v. Allendale Mut. Ins. Co. , 219 F. 3d 501 (5th Cir. La. 2000); Bettigole v. American Employers Ins. Co. , 30 Mass. App. Ct. 272 (Mass. App. Ct. 1991); Cooper v. Am. Family Mut. Ins. Co. , 184 F. Supp. 2d 960 (D. Ariz. 2002); Montefiore Med. Ctr. v. Am. Protection Ins. Co. , 226 F. Supp. 2d 470, 477 (S.D.N.Y. 2002); and GTE Corp. v. Allendale Mut. Ins. Co. , 372 F.3d 598 (3d Cir. N.J. 2004).

There are decisions where some courts carefully parse components of a loss involving an excluded peril to find ensuing damage from a covered peril. See, e.g., Boardwalk Condo Ass'n v. Travelers Indem. Co , 2007 U.S. Dist. LEXIS 48325 (S.D. Cal. 2007); Phillips v. United Servs. Auto. Ass ' n , 146 S.W.3d 629 (Tenn. Ct. App. 2004) (the insured's house was damaged by water penetrating the stucco due to faulty workmanship, and the insured argued that it was not seeking coverage for faulty workmanship, but coverage for the ensuing loss; the court held that rot, though an excluded cause, was covered by ensuing loss provision as water damage and rot are separate perils); Blaine Constr. Corp. v. Insurance Co. of N. Am. , 171 F.3d 343 (6th Cir. Tenn. 1999) (holding that water damage due to faulty workmanship was a covered ensuing loss); and Spiniello Cos. v. Hartford Fire Ins. Co., 2008 U.S. Dist. LEXIS 95009 (D.N.J. 2008) (policy wording did not require another covered peril to trigger coverage). The majority of cases recognize that there must be a separate, distinct event caused by a separate peril.

It is also important to note that an ensuing loss would not be covered if it is separately excluded by another exclusion in the policy. See, e.g., Sprague v. Safeco Ins. Co. of Am. , 174 Wn.2d 524, 529 (Wash. 2012) (losses caused by the excluded peril will be covered unless the ensuing loss is also specifically excluded); and Vision One, LLC v. Phila. Indem. Ins. Co. , 174 Wn.2d 501 (Wash. 2012) (issue as to whether the ensuing clause of one exclusion applied where there were two excluded events and only one exclusion contained an ensuing loss provision).

In sum, while the rule appears simple, there have been strong divergences in opinion in the courts, even among decisions from the same state, as to what is considered an ensuing loss, and whether it is covered or excluded. There have been some thoughtful decisions in recent years indicating that if the ensuing damage occurs as a result of an excluded peril, there is no coverage; however, there are a few decisions that suggest a result-oriented approach. The result often depends on the particular wording of the ensuing loss provision and the judge rendering the decision. There are policies that simply provide coverage for ensuing damage or ensuing damage from a covered peril as opposed to policies that provide coverage for ensuing damage not precluded in the policy.

Courts have also utilized the efficient proximate cause analysis in determining the applicability of policy exclusions containing ensuing loss provisions. See, e.g., Puhlovsky v. Rutgers Cas. Ins. Co., 2012 N.J. Super. Unpub. LEXIS 2091 (App. Div. 2012); Lakes' Byron Store, Inc. v. Auto-Owners Ins. Co. , 589 N.W.2d 608 (S.D. 1999) (upholding a power failure exclusion to bar a claim by the owner of a hunting lodge for food spoilage and business interruption loss as a result of a power outage caused by a snow and ice storm), and Vision One, LLC v. Phila. Indem. Ins. Co. , 174 Wn.2d 501 (Wash. 2012).

Specific Exclusions

We address below, and in an upcoming issue, cases interpreting ensuing loss provisions in various common areas of law, generally corresponding to the specific type of exclusion at issue.

Faulty Workmanship

Judicial construction of the ensuing loss provision frequently occurs in the context of the exclusion for faulty workmanship. The Minnesota case of Friedberg v. Chubb & Son, Inc. , 691 F.3d 948, 953 (8th Cir. Minn. 2012) ruled that the ensuing loss provision may not be used to circumvent an exclusion that “'exclude[s] from coverage the normal results' of defective construction, and applies only to 'distinct, separable, ensuing losses.'” (quoting Sentinel Mgmt. Co. v. N.H. Ins. Co. , 563 N.W.2d 296, 302 (Minn. Ct. App. 1997). The court upheld the denial of coverage for gradual and extensive water damage over a period of time to the insureds' house resulting from defective construction that had enabled water to enter the wall and beams. The insureds argued that the ensuing loss provision removed their loss from the application of the construction defect exclusion. However, the lower court rejected the insureds' argument that the ensuing loss provision applied, analogizing it to another case where the court ruled that “[t]he loss resulted from water that entered due to construction defects, and therefore the water intrusion and resulting loss were 'a single phenomenon … [t]here was no intervening cause other than time.'” Friedberg v. Chubb & Son, Inc ., 832 F. Supp. 2d 1049, 1059 (D. Minn. 2011). There was “no separable and distinct peril” that led to the damage. The court concluded that the faulty construction of the insureds' home was the efficient and proximate cause of the loss. Once the house was plagued with faulty construction, it was a foreseeable and natural consequence that the water would enter. Although water intrusion played an essential role in the damage to the house, it was not an independent and efficient cause of the loss.

Wal-Mart Stores, Inc. v. Gulf Ins. Co., 2005 U.S. Dist. Lexis 46592 (D. Or. 2005), aff'd, 250 Fed. Appx. 221 (9th Cir. 2007) also illustrates how an ensuing loss provision is applied in the context of a construction defect. In Wal-Mart, the concrete floor in the insured's distribution center began curling, which the insured alleged made it dangerous to use the floors, caused damage to the wheels of the forklifts, requiring additional maintenance, and caused the edges of the slabs to break down. The insurers asserted that the insured's loss was caused by faulty design and/or workmanship, and denied coverage. The court found that the cost of replacing the defective specifications, as agreed by the parties, was excluded, and also held that the costs associated with repairing and replacing the concrete floors and associated structures are directly related to and a part of the faulty construction caused by the defective specifications. The court found that at least a portion of the related damages pertained to the cost of additional maintenance to the wheels of the insured's forklifts damaged by the curling of the defective concrete floor, and this type of related damage was a loss that is separate and independent from the defective specification and is recoverable under the policies.

In Laquila Construction, Inc. v. Travelers Indemnity Company of Illinois , 66 F. Supp. 2d 543 (S.D.N.Y. 1999), aff'd memo, 216 F.3d 1072 (2d Cir. N.Y. 2000), the insured contracted with a construction company to provide concrete for its construction of a new building. The contract required the concrete to be a certain minimum strength. The strength of the concrete was discovered to be below “specification.” The defective concrete was replaced using a process, which required “shoring” of the building, and the HVAC ductwork, electrical fixtures, and plumbing units had to be removed and reinstalled. The insured submitted the loss to its insurer requesting coverage for the defective concrete, as well as costs for shoring, removing and reinstalling the above items. The insurer denied the claim on the basis that the plaintiff was seeking the costs of making good faulty or defective workmanship or material.

The court found that the insured's claim fell “squarely into the exclusion clause simply as a cost incurred to make good the defective concrete.” In doing so, the court rejected the insured's argument that the mere incorporation of the defective slab into the building caused the building, as a whole, property damage. The ensuing loss provision did not cover the costs of reinforcing the building and removing and reinstalling other building components while the defective concrete was replaced. The defective concrete caused no damage to any other portion of the structure, other persons or property. The sole claim was for the cost of correcting the deficiencies in the wall. Had the wall, as a result of the deficiencies in the concrete, collapsed and caused damage to some other portion of the work, or to equipment of a subcontractor or some similar thing, the court noted it would be a different case.

The court added that “Laquila's claim for coverage here is no more than an attempt to recover for the excluded costs of making good its faulty or defective workmanship ' [w]ere I to accept the plaintiff's interpretation, it would result in coverage for nearly every instance of defective workmanship ' be it the installation of cracked pipes, faulty electrical wiring, or a defective ventilation system ' whether or not there was any actual ensuing loss or if such loss stemmed directly from a risk expressly and unquestionably excluded by the policy.” Thus, the court found no damage separate and apart from the defective concrete, and no coverage under the ensuing loss provision for the access costs.

This discussion continues in an upcoming issue.

Benjamin Fleischner is a Partner, and Ann Marie Petrey is Of Counsel at White Fleischner & Fino LLP, resident in the Holmdale, NJ, office. Eric Leibowitz is an Associate, resident in the firm's New York office. Please note that this article is written for educational purposes only and does not constitute legal advice or reflect any advice given by White Fleischner & Fino LLP to its clients or the views and opinions of any clients of the firm.