The answer is no.” But precise policy language and applicable state law will play an important role in determining whether coverage should apply in cases of faulty design and construction.
A recent opinion from the Court of Appeals in Washington1 held:
Improper design and construction of the Gardens Condominium roof assembly led to inadequate ventilation, which trapped condensation and excess moisture, damaging the roof. Gardens had an “all risk” policy issued by the Farmers Insurance Exchange. The policy excludes coverage for faulty construction, but “if loss or damage due to a covered cause of loss occurs, [Farmers] will pay for the resulting loss or damage.̵7; Farmers denied coverage for roof repairs and Gardens sued. The district court granted summary judgment for Farmers. Because the trial court misinterpreted the resulting loss clause in Farmer’s policy, we reverse and remand for further proceedings…
The “consequential” or “consequential losses” excepted from exclusions in property insurance are important when the loss of defective design and construction contributes to a loss. These cases are some of the most complex coverage determinations. Sometimes the facts of the case and the policy language are the same, but the state law that applies to them can result in different results. So policyholders should get legal advice anytime an insurer denies a claim based on faulty design and construction.
I highly recommend these posts: Defective construction and subsequent loss provisions, and Whipped cream, honey and subsequent losses covered, be read by those continuing to read this entry to gain a better understanding of how the resulting loss must fit as an exception to the defective design and defective construction exceptions.
The Washington case cited is worth studying. Some cases suggest that policyholders attempt to read the consequential damages exclusions too broadly, rendering the defective design and workmanship exclusions meaningless. The Washington court commented on this argument and reversed it:
And farmers’ concerns that the resulting loss clause will swallow the exemption are unfounded. The resulting loss clause only limits the scope of the exemption. If, on the other hand, we were to construe a resulting loss clause to apply only to independent, unforeseeable covered perils, the clause would be redundant. The insurance already covers unforeseen independent perils that it does not otherwise exclude. Looks GMAC v. Everett Chevrolet, Inc., 179 Wn. App. 129, 135, 317 P.3d 1074 (2014) (we favor contract interpretation that does not render language meaningless or ineffective).
The analysis of case law was very complex, and the court’s reasoning was simple:
Here, Garden’s policy excludes coverage for faulty construction. That exclusion limits Garden’s coverage. But the resulting loss clause limits this exception. In the resulting loss clause, Farmers agreed to pay for any loss or damage caused by a covered peril as a result of faulty construction. The parties stipulated that “[t]The damage has been caused by condensation and/or excessive humidity as a result of insufficient ventilation of the roof unit due to faulty, inadequate or defective construction, repairs and/or reconstruction.’ So if the insurance covers the risks of condensation and excess moisture, it covers the loss or damage from these perils.
Again, these complex cases call for legal opinion. Adjusters and policyholders should seek legal opinions when faced with these cases because the law varies significantly between states. Subtle distinctions based on facts and policy language are important.
For every complex problem there is an answer that is clear, simple and wrong.
1 The Gardens Condominium v. Farmers Ins. ExchangeNo. 83678-1-I (Wash. App. Dec. 19, 2022).