Surprise Scope Changes: How a Resulting Loss Clause Can Bring Unexpected Damage Back into Coverage

From the Desk of Gordon Klug:

Ambiguities in an insurance policy are always construed against the drafter and courts are reluctant to construe exclusions in a manner that limits the scope of coverage. When a provision like a resulting loss clause is present in a policy, insurers should be aware that its language may bring otherwise excluded losses back into coverage.

Claims Pointer:

In this case, the Washington Court of Appeals ruled that a resulting loss clause will provide coverage for damage caused by excluded losses, so long as the damage itself is covered by the policy.  

The Gardens Condo. v. Farmers Ins. Exch., No. 83678-1-I, 2022 WL 17826828, at *1(Wash. Ct. App. Dec. 19, 2022)

Facts:

The Gardens Condo (“Gardens”) is a condominium building in Shoreline, Washington. Due to faulty roof assembly, Gardens experienced water damage on its roof fireboard and sheathing. The flaws were supposedly fixed with the addition of “2×2 sleepers” above the roof’s structural joists. Unfortunately, the sleepers did not add enough space to the roof and did not have their intended effect of increasing ventilation to the area. Thus, accumulated moisture and water continued to damage the roof over the next fifteen years.

Gardens had an all-risk insurance policy with Farmers. The policy covered all physical damage to the building that was not otherwise excluded by the policy. Damage caused by faulty design and faulty repairs, however, were explicitly excluded from coverage. The policy included a provision known as a resulting loss clause, that stated “…if loss or damage by a Covered Cause of Loss results, we will pay for that resulting loss or damage.”

Gardens attempted to secure coverage from Farmers for the damage to their roof. Farmers denied coverage after determining that the damage was caused by faulty construction and design. Gardens argued that the resulting loss clause preserved faulty workmanship coverage if that damage was ultimately caused by a covered cause of loss, which in this case was humidity and condensation. Farmers continued to deny coverage.

Gardens subsequently filed suit against Farmers for breach of contract, and both parties moved for summary judgment. Both parties relied on the same set of stipulated facts regarding the facility design and condensation issues. The trial court sided with Farmers, concluding that defective construction began a chain of events that ultimately led to the damage. Gardens appealed.

Law:

In Vision One, the Washington Supreme Court examined the effect of resulting loss clauses when included in all-risk insurance policies. Vision One, LLC v. Phila. Indem. Ins. Co., 174 Wash.2d at 513-17, 276 P.3d 300 (2012). The Vision One court explained that a resulting loss clause essentially limits the scope of exclusions under the policy by carving out more exceptions to the policy exclusions; if one of the explicitly uncovered events happens, the resulting damage will be covered, while the event itself remains uncovered. Id. at 514-515, 276 P.3d 300. Thus, the most important question when determining coverage under a resulting loss clause is whether the underlying policy covers the damage that results from the excluded event. Id. at 516, 276 P.3d 300. In Vision One, the policy at issue contained a faulty workmanship provision that explicitly excluded coverage for the defect itself. Id. at 518, 276 P.3d 300. The Vision One court concluded that damage resulting from a collapse caused by the defect, however, was a covered peril. Id. at 518, 276 P.3d 300.

Analysis:

The court reasoned that Gardens’ policy specifically excluded coverage of construction defects, but this exclusion was narrowed by the resulting loss clause. The effect of the resulting loss clause was to preserve coverage for damage caused by perils that resulted from the defect, even if the defect itself was uncovered. Thus, if the condensation was a covered peril that resulted from the uncovered roof defect, the insured’s water damage was covered.

Because the trial court misinterpreted the resulting loss clause in the policy, the Court of Appeals remanded the case for further proceedings consistent with this interpretation of the resulting loss clause.

The Big Picture:

This case provides an excellent example of how Washington courts construe the language of insurance policies in favor of the insured. Insurers and attorneys representing insurers should keep this in mind whenever they encounter an ambiguity in a policy. Considering cases like Gardens when determining whether to cover a loss can save time and money.