How Do You Know When Your Loss Ensues?

This two-part article provides an overall review of ensuing loss provisions and their application by courts across the United States. In Part One, we discussed, among other things, Specific Exclusions. This month, we continue the discussion about Faulty Workmanship Exclusions.

Faulty Workmanship Exclusions

In Swire Pacific Holdings v. Zurich Insurance Company, 845 So. 2d 161 (Fla. 2003), demolition of non-defective portions of a building was required in order to correct design defects. The court ruled that it was not an ensuing loss, but rather an excluded loss caused by the defective design.

Swire owned a high-rise condominium building. Zurich issued a builder's risk policy covering the project. In the course of construction, the City of Miami halted issuance of the Certificate of Occupancy based on numerous design defects and failure to comply with appropriate governmental building codes and ordinances. As a result of the design defects, Swire altered the plans for construction to bring the building into compliance, and incurred about $4.5 million in costs to correct the structural deficiencies. Zurich denied coverage on the ground that the claim dealt with the cost of correcting a design defect and there was no physical loss or damage resulting from the defect.

Swire argued that the design defect exclusion did not apply to costs for work that necessarily damages or destroys portions of the property as a result of required remediation or repair of defective property. The Florida Supreme Court noted that Swire's sole claim was an attempt to recover expenses incurred in repairing a design defect. There was no ensuing loss. “No loss separate from, or as a result of, the design defect occurred.” ' “To hold otherwise would be to allow the ensuing loss provision to completely eviscerate and consume the design defect exclusion.” See also Montefiore Med. Ctr. v. Am. Protection Ins. Co., 226 F. Supp. 2d 470, 477 (S.D.N.Y. 2002); and Allianz Ins. Co. v. Impero, 654 F. Supp. 16 (E.D. Wash. 1986).

A New Jersey case, S piniello Cos. v. Hartford Fire Ins. Co., 2008 U.S. Dist. LEXIS 95009 (D.N.J. 2008), is an example of a court finding coverage under the ensuing loss provision of a faulty workmanship exclusion. The policy stated that “we will pay for resulting direct physical 'loss' to other Covered Property, except as otherwise excluded or limited.” Thus, by its very language, the policy wording did not require another covered peril to trigger coverage.

In Spiniello , the insured was in the pipeline rehabilitation and repair business and was engaged to recondition a nine-foot underground concrete sewer pipe. The insured was required to create a pipe liner through the use of a “cured-in-place” process. This process involves mixing chemical catalysts and liquid polymer to form a resin, in which a fabric felt material is soaked. The resin-impregnated felt liner is then installed within an existing concrete pipe. Hydrostatic pressure is used to keep the liner in place while the resin cures or hardens. The insured incurred a loss in connection with the project when a defective catalyst it was using to speed up the hardening of the liner caused the resin to harden prematurely, thereby collapsing and ultimately destroying the polyester liner that the insured was installing in the pipe. The insurer denied coverage based on the faulty materials exclusionary provision. The court found coverage under the ensuing loss provision, even though the defective catalyst was part of the finished liner. The court explained that the insured “alleged physical damage to the liner,” which the court found to be “separate from the defective property itself.”

In Costco Wholesale Corp. v. Commonwealth Ins. Co., 45 Fed. Appx. 646 (9th Cir. Wash. 2002), the Ninth Circuit unlinked the resultant damage from the excluded cause, and ruled that “costs incurred in connection with damage to its new warehouse in New Rochelle, New York after the building's foundation differentially settled” were covered. The appellate court affirmed the finding of the district court granting summary judgment to Costco, holding that its costs incurred in connection with the damage fell under the “ensuing loss” clause exception to the policies' defective workmanship exclusions. The court found that the exclusion for faulty or defective workmanship or design was limited by the ensuing loss provision, which held the company would be liable for damage caused by or resulting from an insured peril. The court explained:

Movement of the earth was a risk insured against. Movement of the earth caused Costco's loss. Movement of the earth is distinct from the defective design and the loss did ensue from the defective design. Movement of the earth was not an excluded peril.

Latent Defect/Inherent Vice

In the oft-cited case, Acme Galvanizing Co. v. Fireman ' s Fund Ins. Co., 221 Cal. App. 3d 170 (Cal. App. 1st Dist. 1990), the court engaged in a discussion that is useful in understanding the intent of the provision. A steel kettle at Acme's plant ruptured, allowing seven tons of molten zinc in the galvanizing process to spill onto the surrounding equipment. The insurer denied coverage on the ground that the loss was not the result of an external cause, but rather a latent defect or inherent vice in the kettle. The insured argued that even if the rupture was caused by a latent defect, the discharge of molten zinc, which damaged and destroyed surrounding equipment, was an ensuing loss. The wording of the policy covered ensuing loss that was not otherwise excluded.

The policy in Acme provided: “The Property Coverage does not insure against loss caused by, resulting from, contributed to or aggravated by: [para.] 13. Inherent vice, latent defect, wear and tear, marring and scratching, gradual deterioration, moths, termites or other insects or vermin, unless loss by a peril not otherwise excluded ensues and then the Company shall be liable only for such ensuing loss. ' “

The court held that:

We interpret the ensuing loss provision to apply to the situation where there is a “peril,” i.e., a hazard or occurrence which causes a loss or injury, separate and independent but resulting from the original excluded peril, and this new peril is not an excluded one, from which loss ensues.

In Acme, there was no peril separate from and in addition to the initial excluded peril of the welding failure and kettle rupture. The spillage of molten zinc was part of the loss directly caused by the excluded peril, and a foreseeable result. If a bucket breaks, the contents spill and damage is likely to occur. If the molten zinc had ignited a fire or caused an explosion that destroyed the plant, then the court noted the fire or explosion would have been a new covered peril with the ensuing loss covered. It is not foreseeable that a fire will occur if a bucket breaks. That, however, did not occur.

In GTE Corporation v. Allendale Mutual Insurance Company, et al., 372 F.3d 598 (3d Cir. N.J. 2004), the insured sought coverage for costs and expenses incurred in remediating its computer systems to avoid Y2K-related date-recognition problems. In holding that the insured's claim was barred by the plain language of the defective design and inherent vice policy exclusions, the Third Circuit ruled that the problem was not that a program or system malfunctioned, or some external threat caused damage to GTE's systems. Rather, the system performed in exactly the manner in which it was designed to operate. The court considered whether the ensuing loss should be construed narrowly, i.e , that the “ensuing loss” needs to be the result of an “intervening cause” or be “beyond that normally expected.” Ultimately, the court concluded that the insured had failed to establish any physical damage (not normally expected) “wholly separate from the defective property itself.”

Water Damage and Mold/Rot

The interplay of water damage with mold and rot has engendered a number of significant decisions. A common example is leaks from rain due to faulty workmanship of the exterior of a house In Schloss v. Cincinatti Ins. Co., 54 F. Supp. 2d 1090 (M.D. Ala 1999), significant rot damage caused by water intrusion from faulty workmanship and/or design was discovered while repairs were performed to a house. Repair of rot damage required removal and replacement of a roof and other parts of the house that were undamaged. The homeowner's policy excluded rot, and the court rejected the insured's argument, among others, that rot was a form of water damage. The court ruled that the repair costs were “part of the cost of repair of the rot, not a separate ensuing loss.”

Similarly, the court in Aetna Casualty & Surety Co. v. Yates , 344 F.2d 939 (5th Cir. Tex. 1965), distinguished between water damage and rot. The olicy excluded “Loss caused by inherent vice, wear and tear, deterioration; rust, rot, mould or other fungi; dampness of atmosphere, extremes of temperature; contamination; vermin, termites, moths or other insects.” The insureds discovered that “the joists, sills and subflooring of their home were almost completely rotted away” due to inadequate ventilation in the home's crawl space. The insureds sued to recover for damage to their home under an all-risk homeowners policy, where rot was specifically excluded, but the exclusion for rot was inapplicable if the rot was caused by water damage. The court, in upholding the denial of coverage, held that the rot was caused not by “the direct intrusion of water,” which would amount to water damage, but by the presence of moisture:

We do not think that a single phenomenon that is clearly an excluded risk under the policy was meant to become compensable because in a philosophical sense it can also be classified as water damage; it would not be easy to find a case of rot or dampness of atmosphere not equally subject to that label and the exclusions would become practically meaningless. In our case the rot may have ensued from water but not from water damage, and the damage ensuing from the rot was not the damage from the direct intrusion of water conveyed by the phrase 'water damage.'

In Boughan v. Nationwide Property & Casualty Company, 2005 Ohio 244 (Ohio 2005), the insured's home had faulty brickwork, which allowed water to seep into the house, causing rotten floorboards. The policy issued to the insured excluded from coverage wear and tear, deterioration, latent defect, wet or dry rot and the settling of walls, floors roofs or ceilings. The policy further provided that any ensuing loss not excluded under the policy was covered. The insured argued that the water seepage was the underlying cause of loss, which was not specifically excluded by the policy. The court noted, however, that even if water seepage was the cause of loss, it occurred because of deterioration, latent defect or the settling of the floors. Thus, the court found that the exclusion still applied to prevent coverage for the rotten floorboards, despite the ensuing loss provision, and explained as follows:

[T]he [plaintiffs] are not attempting to recover for the water seepage, but for the cause of the seepage and the damage that resulted. Ultimately, the repairs they paid out-of-pocket were to repair the brickwork and the rotted floorboards, both of which are damages specifically excluded from coverage under the policy. In other words, both the underlying cause of the damage ' the deterioration of the brickwork ' and the ensuing loss ' the rotted floorboard ' are excluded from coverage. The [plaintiffs'] attempt to argue that the water seepage, an intermediary cause, is not excluded is an attempt to circumvent the plain language of the policy.

There are contrary cases. See, e.g., Eckstein v. Cincinnati Ins. Co., 469 F. Supp. 2d 455 (W.D. Ky. 2007) (water damage and resulting mold were ensuing losses caused by faulty workmanship).

Coverage for mold under all-risk policies has been addressed in a variety of contexts, including the applicability of exclusions for mold, and exclusions for other perils that may have caused the water damage resulting in mold. Some jurisdictions have held that mold caused by excluded perils is covered, while others have held that the mold damage is excluded, and still other cases have held that the mold damage is not a separate peril, and thus not an ensuing loss.

Exclusions for mold have generally been upheld. For example, in Fiess v. State Farm Lloyds, 202 S.W.3d 744 (Tex. 2006), the Texas Supreme Court upheld the exclusion for “rust, rot, mold or other fungi” in a state-approved homeowners policy form and rejected the insured's argument in the mold context that an ensuing loss provision can make an excluded loss reappear as a covered loss. See also Cooper v. Am. Family Mut. Ins. Co., 184 F.Supp.2d 960 (D. Ariz. 2002); Hritz v. Saco, 795 N.Y.S.2d 236 (N.Y. App. Div. 1st Dep't 2005); and Atlantic Mut. Ins. Cos. v. Lotz, 384 F. Supp. 2d 1292 (E.D. Wis. 2005). As discussed below, some courts have ruled that mold as a loss, as opposed to a cause of loss, is not barred by the exclusion for mold.

Courts around the country, including Fiess, have relied on the Yates decision in the mold context, even though it was decided more than 40 years ago. See, e.g., Grossberg v. Chubb Ins. Co., 2012 N.J. Super. Unpub. LEXIS 1981 (App. Div. 2012); City of Burlington v. Hartford Steam Boiler Inspection & Ins. Co., 190 F. Supp. 2d 663 (D. Vt. 2002); and Watson v. Allstate Tex. Lloyd's , 224 Fed. Appx. 335 (5th Cir. Tex. 2007) (ensuing loss provision does not provide coverage for mold contamination resulting from water damage otherwise covered under the policy); Prudential Prop. & Cas. Ins. Co. v. Lillard Roberts, 2002 U.S. Dist. LEXIS 20384 (D. Or. 2002) (“mold damage is a loss that arises directly from water damage; if that water damage is caused by faulty workmanship and excluded, then so is the mold damage”).

As mentioned above, coverage for mold has also been considered by courts in the context of mold as a loss or cause of loss. Some courts have found that the ensuing loss exception in some exclusions was applicable and removed the loss from the exclusion. See, e.g., Liristis v. Am. Family Mut. Ins. Co., 204 Ariz. 140 (Ariz. Ct. App. 2002) (the court held that mold caused by a covered cause of loss was covered under the property policy); Eckstein v. Cincinnati Ins. Co. , 469 F. Supp. 2d 444 (W.D. Ky. 2007) (“when mold ensues from water damage which is covered under the policy, the mold damage is covered despite the exclusion.”); Simonetti v. Selective Ins. Co , 372 N.J. Super. 421 (App. Div. 2004); and Boardwalk Condo. Ass'n v. Travelers Indem. Co., 2007 U.S. Dist. LEXIS 48325 (S.D. Cal. 2007). Other courts have enforced the mold exclusion. See, e.g., Cooper v. Am. Family Mut. Ins. Co., 184 F.Supp.2d 960 (D. Ariz. 2002); Hritz v. Saco , 795 N.Y.S.2d 236 (N.Y. App. Div. 1st Dep't 2005); and Atlantic Mut. Ins. Cos. v. Lotz, 384 F. Supp. 2d 1292 (E.D. Wis. 2005).

In Simonetti, the appellate court concluded that the insured's loss could be viewed in two ways; “[m]old can be both a loss and a cause of loss.” (citing Liristis v. American Family Mut. Ins. Co., 204 Ariz. 140, 61 P.3d 22, 25 (Ct. App. 2002). The standard exclusion was narrowly construed to exclude mold only when it is the cause of loss and not resulting damage. The Simonetti decision makes clear that mold is covered only if it is caused by a covered loss as opposed to excluded perils.

Mechanical Breakdown

Judicial interpretation of ensuing loss provisions has also arisen in the context of mechanical breakdown. In Kopp v. Newark Ins. Co., 204 N.J. Super. 415 (App. Div., 1985), the plaintiffs sought recovery from the defendant for damage to an elevator, and for funds expended to repair the damage caused in trying to extricate an employee from the elevator. The policy contained an exclusion for losses caused by mechanical breakdown (and various other causes) unless loss by a peril not otherwise excluded ensues and then the company would be liable for only such ensuing loss. The court ruled that although the costs necessary to repair the mechanical breakdown of the elevator were expressly excluded by the policy, the damages to the elevator occurring thereafter in the attempt to free the employee fell within the broad general coverage provided by the defendant's Special Multi-Peril policy. Additionally, the court determined that the exclusion for mechanical breakdown did not apply to the loss because the loss “ensued” after the mechanical breakdown from a “peril not otherwise excluded.” The damage caused by attempting to free trapped people is not itself a foreseeable and natural consequence of a mechanical breakdown of a piece of equipment.

See also Babcock & Wilcox Ebensburg Power, Inc. v. Zurich Am. Ins. Co., 368 F.Supp.2d 387 (W.D. Pa. 2004) (gradual cracking was an excluded loss, but mechanical breakdown of machinery that ensued from the excluded peril would be covered, as the mechanical breakdown would be a separate peril, although the court denied a summary judgment motion on this issue due to disputed facts).

Conclusion

The point of this article is to provide information that will be useful in determining insurance coverage where the issue of ensuing loss arises. The short takeaway is that coverage for ensuing loss claims, like other insurance coverage issues, depends on the policy wording, the specific facts and the applicable law.

Benjamin Fleischner is a Partner, Ann Marie Petrey is Of Counsel and Eric Leibowitz is an Associate, at White Fleischner & Fino LLP. Mr. Fleischner and Ms. Petrey are resident in the Holmdale, NJ, office, while Mr. Leibowitz is 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.

This two-part article provides an overall review of ensuing loss provisions and their application by courts across the United States. In Part One, we discussed, among other things, Specific Exclusions. This month, we continue the discussion about Faulty Workmanship Exclusions.

Faulty Workmanship Exclusions

In Swire Pacific Holdings v. Zurich Insurance Company , 845 So. 2d 161 (Fla. 2003), demolition of non-defective portions of a building was required in order to correct design defects. The court ruled that it was not an ensuing loss, but rather an excluded loss caused by the defective design.

Swire owned a high-rise condominium building. Zurich issued a builder's risk policy covering the project. In the course of construction, the City of Miami halted issuance of the Certificate of Occupancy based on numerous design defects and failure to comply with appropriate governmental building codes and ordinances. As a result of the design defects, Swire altered the plans for construction to bring the building into compliance, and incurred about $4.5 million in costs to correct the structural deficiencies. Zurich denied coverage on the ground that the claim dealt with the cost of correcting a design defect and there was no physical loss or damage resulting from the defect.

Swire argued that the design defect exclusion did not apply to costs for work that necessarily damages or destroys portions of the property as a result of required remediation or repair of defective property. The Florida Supreme Court noted that Swire's sole claim was an attempt to recover expenses incurred in repairing a design defect. There was no ensuing loss. “No loss separate from, or as a result of, the design defect occurred.” ' “To hold otherwise would be to allow the ensuing loss provision to completely eviscerate and consume the design defect exclusion.” See also Montefiore Med. Ctr. v. Am. Protection Ins. Co. , 226 F. Supp. 2d 470, 477 (S.D.N.Y. 2002); and Allianz Ins. Co. v. Impero , 654 F. Supp. 16 (E.D. Wash. 1986).

A New Jersey case, S piniello Cos. v. Hartford Fire Ins. Co., 2008 U.S. Dist. LEXIS 95009 (D.N.J. 2008), is an example of a court finding coverage under the ensuing loss provision of a faulty workmanship exclusion. The policy stated that “we will pay for resulting direct physical 'loss' to other Covered Property, except as otherwise excluded or limited.” Thus, by its very language, the policy wording did not require another covered peril to trigger coverage.

In Spiniello , the insured was in the pipeline rehabilitation and repair business and was engaged to recondition a nine-foot underground concrete sewer pipe. The insured was required to create a pipe liner through the use of a “cured-in-place” process. This process involves mixing chemical catalysts and liquid polymer to form a resin, in which a fabric felt material is soaked. The resin-impregnated felt liner is then installed within an existing concrete pipe. Hydrostatic pressure is used to keep the liner in place while the resin cures or hardens. The insured incurred a loss in connection with the project when a defective catalyst it was using to speed up the hardening of the liner caused the resin to harden prematurely, thereby collapsing and ultimately destroying the polyester liner that the insured was installing in the pipe. The insurer denied coverage based on the faulty materials exclusionary provision. The court found coverage under the ensuing loss provision, even though the defective catalyst was part of the finished liner. The court explained that the insured “alleged physical damage to the liner,” which the court found to be “separate from the defective property itself.”

In Costco Wholesale Corp. v. Commonwealth Ins. Co. , 45 Fed. Appx. 646 (9th Cir. Wash. 2002), the Ninth Circuit unlinked the resultant damage from the excluded cause, and ruled that “costs incurred in connection with damage to its new warehouse in New Rochelle, New York after the building's foundation differentially settled” were covered. The appellate court affirmed the finding of the district court granting summary judgment to Costco, holding that its costs incurred in connection with the damage fell under the “ensuing loss” clause exception to the policies' defective workmanship exclusions. The court found that the exclusion for faulty or defective workmanship or design was limited by the ensuing loss provision, which held the company would be liable for damage caused by or resulting from an insured peril. The court explained:

Movement of the earth was a risk insured against. Movement of the earth caused Costco's loss. Movement of the earth is distinct from the defective design and the loss did ensue from the defective design. Movement of the earth was not an excluded peril.

Latent Defect/Inherent Vice

In the oft-cited case, Acme Galvanizing Co. v. Fireman ' s Fund Ins. Co. , 221 Cal. App. 3d 170 (Cal. App. 1st Dist. 1990), the court engaged in a discussion that is useful in understanding the intent of the provision. A steel kettle at Acme's plant ruptured, allowing seven tons of molten zinc in the galvanizing process to spill onto the surrounding equipment. The insurer denied coverage on the ground that the loss was not the result of an external cause, but rather a latent defect or inherent vice in the kettle. The insured argued that even if the rupture was caused by a latent defect, the discharge of molten zinc, which damaged and destroyed surrounding equipment, was an ensuing loss. The wording of the policy covered ensuing loss that was not otherwise excluded.

The policy in Acme provided: “The Property Coverage does not insure against loss caused by, resulting from, contributed to or aggravated by: [para.] 13. Inherent vice, latent defect, wear and tear, marring and scratching, gradual deterioration, moths, termites or other insects or vermin, unless loss by a peril not otherwise excluded ensues and then the Company shall be liable only for such ensuing loss. ' “

The court held that:

We interpret the ensuing loss provision to apply to the situation where there is a “peril,” i.e., a hazard or occurrence which causes a loss or injury, separate and independent but resulting from the original excluded peril, and this new peril is not an excluded one, from which loss ensues.

In Acme, there was no peril separate from and in addition to the initial excluded peril of the welding failure and kettle rupture. The spillage of molten zinc was part of the loss directly caused by the excluded peril, and a foreseeable result. If a bucket breaks, the contents spill and damage is likely to occur. If the molten zinc had ignited a fire or caused an explosion that destroyed the plant, then the court noted the fire or explosion would have been a new covered peril with the ensuing loss covered. It is not foreseeable that a fire will occur if a bucket breaks. That, however, did not occur.

In GTE Corporation v. Allendale Mutual Insurance Company, et al., 372 F.3d 598 (3d Cir. N.J. 2004), the insured sought coverage for costs and expenses incurred in remediating its computer systems to avoid Y2K-related date-recognition problems. In holding that the insured's claim was barred by the plain language of the defective design and inherent vice policy exclusions, the Third Circuit ruled that the problem was not that a program or system malfunctioned, or some external threat caused damage to GTE's systems. Rather, the system performed in exactly the manner in which it was designed to operate. The court considered whether the ensuing loss should be construed narrowly, i.e , that the “ensuing loss” needs to be the result of an “intervening cause” or be “beyond that normally expected.” Ultimately, the court concluded that the insured had failed to establish any physical damage (not normally expected) “wholly separate from the defective property itself.”

Water Damage and Mold/Rot

The interplay of water damage with mold and rot has engendered a number of significant decisions. A common example is leaks from rain due to faulty workmanship of the exterior of a house In Schloss v. Cincinatti Ins. Co. , 54 F. Supp. 2d 1090 (M.D. Ala 1999), significant rot damage caused by water intrusion from faulty workmanship and/or design was discovered while repairs were performed to a house. Repair of rot damage required removal and replacement of a roof and other parts of the house that were undamaged. The homeowner's policy excluded rot, and the court rejected the insured's argument, among others, that rot was a form of water damage. The court ruled that the repair costs were “part of the cost of repair of the rot, not a separate ensuing loss.”

Similarly, the court in Aetna Casualty & Surety Co. v. Yates , 344 F.2d 939 (5th Cir. Tex. 1965), distinguished between water damage and rot. The olicy excluded “Loss caused by inherent vice, wear and tear, deterioration; rust, rot, mould or other fungi; dampness of atmosphere, extremes of temperature; contamination; vermin, termites, moths or other insects.” The insureds discovered that “the joists, sills and subflooring of their home were almost completely rotted away” due to inadequate ventilation in the home's crawl space. The insureds sued to recover for damage to their home under an all-risk homeowners policy, where rot was specifically excluded, but the exclusion for rot was inapplicable if the rot was caused by water damage. The court, in upholding the denial of coverage, held that the rot was caused not by “the direct intrusion of water,” which would amount to water damage, but by the presence of moisture:

We do not think that a single phenomenon that is clearly an excluded risk under the policy was meant to become compensable because in a philosophical sense it can also be classified as water damage; it would not be easy to find a case of rot or dampness of atmosphere not equally subject to that label and the exclusions would become practically meaningless. In our case the rot may have ensued from water but not from water damage, and the damage ensuing from the rot was not the damage from the direct intrusion of water conveyed by the phrase 'water damage.'

In Boughan v. Nationwide Property & Casualty Company , 2005 Ohio 244 (Ohio 2005), the insured's home had faulty brickwork, which allowed water to seep into the house, causing rotten floorboards. The policy issued to the insured excluded from coverage wear and tear, deterioration, latent defect, wet or dry rot and the settling of walls, floors roofs or ceilings. The policy further provided that any ensuing loss not excluded under the policy was covered. The insured argued that the water seepage was the underlying cause of loss, which was not specifically excluded by the policy. The court noted, however, that even if water seepage was the cause of loss, it occurred because of deterioration, latent defect or the settling of the floors. Thus, the court found that the exclusion still applied to prevent coverage for the rotten floorboards, despite the ensuing loss provision, and explained as follows:

[T]he [plaintiffs] are not attempting to recover for the water seepage, but for the cause of the seepage and the damage that resulted. Ultimately, the repairs they paid out-of-pocket were to repair the brickwork and the rotted floorboards, both of which are damages specifically excluded from coverage under the policy. In other words, both the underlying cause of the damage ' the deterioration of the brickwork ' and the ensuing loss ' the rotted floorboard ' are excluded from coverage. The [plaintiffs'] attempt to argue that the water seepage, an intermediary cause, is not excluded is an attempt to circumvent the plain language of the policy.

There are contrary cases. See, e.g., Eckstein v. Cincinnati Ins. Co. , 469 F. Supp. 2d 455 (W.D. Ky. 2007) (water damage and resulting mold were ensuing losses caused by faulty workmanship).

Coverage for mold under all-risk policies has been addressed in a variety of contexts, including the applicability of exclusions for mold, and exclusions for other perils that may have caused the water damage resulting in mold. Some jurisdictions have held that mold caused by excluded perils is covered, while others have held that the mold damage is excluded, and still other cases have held that the mold damage is not a separate peril, and thus not an ensuing loss.

Exclusions for mold have generally been upheld. For example, in Fiess v. State Farm Lloyds , 202 S.W.3d 744 (Tex. 2006), the Texas Supreme Court upheld the exclusion for “rust, rot, mold or other fungi” in a state-approved homeowners policy form and rejected the insured's argument in the mold context that an ensuing loss provision can make an excluded loss reappear as a covered loss. See also Cooper v. Am. Family Mut. Ins. Co. , 184 F.Supp.2d 960 (D. Ariz. 2002); Hritz v. Saco , 795 N.Y.S.2d 236 (N.Y. App. Div. 1st Dep't 2005); and Atlantic Mut. Ins. Cos. v. Lotz , 384 F. Supp. 2d 1292 (E.D. Wis. 2005). As discussed below, some courts have ruled that mold as a loss, as opposed to a cause of loss, is not barred by the exclusion for mold.

Courts around the country, including Fiess, have relied on the Yates decision in the mold context, even though it was decided more than 40 years ago. See, e.g., Grossberg v. Chubb Ins. Co., 2012 N.J. Super. Unpub. LEXIS 1981 (App. Div. 2012); City of Burlington v. Hartford Steam Boiler Inspection & Ins. Co. , 190 F. Supp. 2d 663 (D. Vt. 2002); and Watson v. Allstate Tex. Lloyd ' s , 224 Fed. Appx. 335 (5th Cir. Tex. 2007) (ensuing loss provision does not provide coverage for mold contamination resulting from water damage otherwise covered under the policy); Prudential Prop. & Cas. Ins. Co. v. Lillard Roberts, 2002 U.S. Dist. LEXIS 20384 (D. Or. 2002) (“mold damage is a loss that arises directly from water damage; if that water damage is caused by faulty workmanship and excluded, then so is the mold damage”).

As mentioned above, coverage for mold has also been considered by courts in the context of mold as a loss or cause of loss. Some courts have found that the ensuing loss exception in some exclusions was applicable and removed the loss from the exclusion. See, e.g., Liristis v. Am. Family Mut. Ins. Co. , 204 Ariz. 140 (Ariz. Ct. App. 2002) (the court held that mold caused by a covered cause of loss was covered under the property policy); Eckstein v. Cincinnati Ins. Co. , 469 F. Supp. 2d 444 (W.D. Ky. 2007) (“when mold ensues from water damage which is covered under the policy, the mold damage is covered despite the exclusion.”); Simonetti v. Selective Ins. Co , 372 N.J. Super. 421 (App. Div. 2004); and Boardwalk Condo. Ass'n v. Travelers Indem. Co., 2007 U.S. Dist. LEXIS 48325 (S.D. Cal. 2007). Other courts have enforced the mold exclusion. See, e.g., Cooper v. Am. Family Mut. Ins. Co. , 184 F.Supp.2d 960 (D. Ariz. 2002); Hritz v. Saco , 795 N.Y.S.2d 236 (N.Y. App. Div. 1st Dep't 2005); and Atlantic Mut. Ins. Cos. v. Lotz , 384 F. Supp. 2d 1292 (E.D. Wis. 2005).

In Simonetti , the appellate court concluded that the insured's loss could be viewed in two ways; “[m]old can be both a loss and a cause of loss.” (citing Liristis v. American Family Mut. Ins. Co. , 204 Ariz. 140, 61 P.3d 22, 25 (Ct. App. 2002). The standard exclusion was narrowly construed to exclude mold only when it is the cause of loss and not resulting damage. The Simonetti decision makes clear that mold is covered only if it is caused by a covered loss as opposed to excluded perils.

Mechanical Breakdown

Judicial interpretation of ensuing loss provisions has also arisen in the context of mechanical breakdown. In Kopp v. Newark Ins. Co. , 204 N.J. Super. 415 (App. Div., 1985), the plaintiffs sought recovery from the defendant for damage to an elevator, and for funds expended to repair the damage caused in trying to extricate an employee from the elevator. The policy contained an exclusion for losses caused by mechanical breakdown (and various other causes) unless loss by a peril not otherwise excluded ensues and then the company would be liable for only such ensuing loss. The court ruled that although the costs necessary to repair the mechanical breakdown of the elevator were expressly excluded by the policy, the damages to the elevator occurring thereafter in the attempt to free the employee fell within the broad general coverage provided by the defendant's Special Multi-Peril policy. Additionally, the court determined that the exclusion for mechanical breakdown did not apply to the loss because the loss “ensued” after the mechanical breakdown from a “peril not otherwise excluded.” The damage caused by attempting to free trapped people is not itself a foreseeable and natural consequence of a mechanical breakdown of a piece of equipment.

See also Babcock & Wilcox Ebensburg Power, Inc. v. Zurich Am. Ins. Co. , 368 F.Supp.2d 387 (W.D. Pa. 2004) (gradual cracking was an excluded loss, but mechanical breakdown of machinery that ensued from the excluded peril would be covered, as the mechanical breakdown would be a separate peril, although the court denied a summary judgment motion on this issue due to disputed facts).

Conclusion

The point of this article is to provide information that will be useful in determining insurance coverage where the issue of ensuing loss arises. The short takeaway is that coverage for ensuing loss claims, like other insurance coverage issues, depends on the policy wording, the specific facts and the applicable law.

Benjamin Fleischner is a Partner, Ann Marie Petrey is Of Counsel and Eric Leibowitz is an Associate, at White Fleischner & Fino LLP. Mr. Fleischner and Ms. Petrey are resident in the Holmdale, NJ, office, while Mr. Leibowitz is 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.