Tag Archives: ensuing loss exception

ENSUING LOSS EXCEPTION IN PROPERTY INSURANCE POLICIES

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Property insurance policies such as builder’s risk policies contain a design defect / faulty workmanship exclusion (as well as other exclusions for excluded risks or perils).  But, certain exclusions such as the design defect / faulty workmanship exclusion may contain what is referred to as the “ensuing loss exception.”   Stated differently, a design defect / faulty work is excluded from the insurance policy BUT losses ensuing (or separately resulting) from the design defect / faulty work are excepted from this exclusion and covered under the policy.  If your initial reaction as to the application of the ensuing loss exception is “huh?!?,” then that exact sentiment is shared by others.  Trust me! 

 

The Florida Supreme Court decision in Swire Pacific Holdings, Inc. v. Zurich Ins. Co., 845 So.2d 161 (Fla. 2003) dealt with a design defect exclusion that read:

 

Loss or damage caused by fault, defect, error or omission in design, plan or specification, but this exclusion shall not apply to physical loss or damage resulting from such fault, defect, error or omission in design, plan or specification.

 

This initial part of this exclusion is a design defect exclusion.  The underlined part is the ensuing loss exception to this exclusion.

 

In Swire, errors and omissions with the structural design and, therefore, structural work, of a condominium project halted the issuance of the certificate of occupancy for the condominium.  The developer incurred $4.5 million to retain a new structural engineer to modify the plans as well as corrective structural work in the field.  The developer then submitted a builder’s risk insurance claim.  The builder’s risk insurance carrier denied coverage based on the foregoing design defect exclusion arguing that the developer incurred money to correct a design defect, but there were no covered losses or damages ensuing from the design defect.  The Florida Supreme Court agreed with the builder’s risk insurer:

 

Swire’s [developer’s] sole claim here is an attempt to recover the expenses incurred in repairing a design defect. No ensuing loss resulted [from the design defect] to invoke the exception to the exclusionary provision…. No loss separate from, or as a result of, the design defect occurred. Therefore, we conclude…Swire is not entitled to recover the expenses associated with repairing the design defect. To hold otherwise would be to allow the ensuing loss provision to completely eviscerate and consume the design defect exclusion….This [builder’s risk insurance] contract does not operate as a warranty for faulty workmanship and should not be transformed into a guarantee against design and construction defects.

 

Swire, 845 So.2d at 167-68.

 

In a more recent case, Peek v. American Integrity Ins. Co. of Florida, 2015 WL 5616294 (Fla. 2d DCA 2015), a property insurance policy contained the following ensuing loss exception:

 

“We do not insure loss to property described in Coverages A and B caused by any of the following. However, any ensuing loss to property described in Coverages A and B not excluded or excepted in this policy is covered.”

 

Coverages A and B contained exclusions for latent defects, corrosion, faulty workmanship and pollution.  Thus, the property insurance policy did not cover these items but it did cover “any ensuing loss…not excluded or excepted in this policy.” 

 

Peek dealt with homeowners moving into a house with Chinese drywall.  The homeowners contended that the Chinese drywall resulted in a noxious smell and corroded air conditioning coils.  The homeowners contended that the defective drywall (exclusion) resulted in (a) the loss of use of their house due to the noxious smell and (b) damage in the form of corrosion to air conditioning coils, and that such items should be covered under the ensuing loss exception.

 

The Second District Court of Appeal disagreed with the homeowners regarding the application of the ensuing loss provision. The court explained:

 

An ensuing loss follows as a consequence of an excluded loss, and the crux of the ensuing loss provision is that there must be a covered cause of loss that ensues from the excluded cause of loss….Given that American Integrity [property insurer] proved that the Chinese drywall was an excluded defective construction material, it was the Peeks’ [homeowners] burden to demonstrate that the policy covered a loss that occurred subsequent to and as a result of that excluded peril.

 

First, the evidence below demonstrated that the odor present in the Peeks’ home was a manifestation of the sulfur gases emanating from the Chinese drywall and that the corrosion was caused by the chemicals released by the sulfur gases, which emanated from the Chinese drywall. As such, the losses were not “ensuing.” …

 

Additionally, both of the claimed ensuing losses are specifically excluded under the policy because an excluded cause of loss—defective Chinese drywall—led directly to another set of exclusions—pollution and corrosion….. Here, the damage to the Peeks’ home and consequently the odors and corrosion of metals and electronics were directly related to the defective Chinese drywall and thus directly stemmed from an excluded risk. Thus coverage was excluded under the express terms of the insurance contract.

 

Peeks, supra, at *4.

 

Recovering losses or damage under an insurance policy can be challenging in light of the various exclusions in the policy.  Even the ensuing loss exception to exclusions, as demonstrated above, does not except from policy exclusions the types of losses that an insured may seek to recoup.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

UNDERSTANDING INSURANCE COVERAGE – NOT AN EASY FEAT

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Knowing what losses or damages are covered under your insurance policy is extremely important and oftentimes ignored until there is a substantial a loss or damage. But, understanding your insurance coverage is very important so that you know exactly what is covered and what supplemental insurance you may want to procure to protect your interests.

 

Most owners obtain some form of property insurance. Property insurance is designed to cover those direct losses (or “all-risks”) except those losses that are excluded from coverage. This is tricky because you start off with broad coverage that gets dwindled down by various exclusions and policy endorsements that restrict coverage. Understanding these exclusions and endorsements is the key to knowing what is covered and, in many cases, how to present a claim to an insurer. This is not easy because insurance policies are confusing.

 

To explain the confusing language in insurance policies, in Certain Interested Underwriters at Lloyd’s, London Subscribing to Policy Number, MI2226 v. Chabad Lubavitch of Greater Florida, Inc., 36 Fla. L. Weekly D1218a (4th DCA 2011), a building was damaged when a crane landed on it during a tropical storm. The owner had two property insurance policies. It had a policy covering wind damage (“Wind Policy”) and a separate all-risk policy with Lloyd’s of London that excluded windstorm (“Lloyd’s Policy”). The owner’s damages exceeded the limits of its Wind Policy so it smartly submitted a claim under the Lloyd’s Policy for the additional damages arguing that this policy should provide coverage becuase the crane, not the wind, actually caused the damage.

 

The Lloyd’s Policy contained the following exclusion for wind:

 

“We will not pay for loss or damage:

1. Caused directly or indirectly by Windstorm or Hail, regardless of any other cause or event that contributes concurrently or in any sequence to the loss or damage…

But if Windstorm or Hail results in a cause of loss other than rain, snow, sand or dust, and that resulting cause of loss is a Covered Cause of Loss, we will pay for the loss or damage caused by such Covered Cause of Loss. For example, if the Windstorm or Hail damages a heating system and fire results, the loss or damage attributable to the fire is covered subject to any other applicable policy provisions.”

 

This bolded language is known as the Ensuing Loss Exception to the windstorm exclusion. Confusing – Oh Yes. What this language really says is that the policy will not cover wind damage, BUT if the wind results in a loss that sets in motion another loss that would be covered under the policy, there is coverage for the other loss. The language in the policy is so confusing that it contains a hypothetical. The hypothetical is really what gives meaning to the application of this Ensuing Loss Exception. The hypothetical illustrates that if a windstorm damages a heating system, the damage to the heating system would not be covered due to the wind exclusion. But, if the damage to the heating system sets in motion an intervening fire that causes damage, this fire damage would be covered. The reason this damage would be covered is because it was not caused by the wind, but rather the ensuing fire (even though the fire was set in motion by damage caused by the wind).

 

In this case, the Fourth District remanded this case to the trial court to determine the actual cause of the crane falling on the building since it was a factual issue in dispute. Under the Court’s line of thinking, if the crane fell on the building because of wind, there would not be coverage under the Lloyd’s Policy due to the wind exclusion. However, if the crane fell on the building due to some other intervening loss set in motion by the wind there should be coverage under this Ensuing Loss Exception. In other words, if the crane fell because some flying object picked up by the wind struck the crane causing the crane to fall on the building, there would arguably be coverage for the loss to the building.

 

This case is an example of the confusing language in policies and having an understanding of the language can enable you to present arguments to maximize insurance coverage.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.