Property Insurance Coverage Law Blog : Florida Insurance Lawyer & Attorney : Merlin Law Group Law Firm : Tampa, Houston, Coral Gables, Gulfport

In RLI Insurance Co. v. Willbros Construction (U.S.) L.L.C., et al., the issue before the Court was whether a particular exclusion in an insurance policy precludes coverage of the value of line pipe that the defendants attempted to install under a river. The defendant in this case was hired to construct a natural gas pipeline. Willbros Construction hired a subcontractor to drill the pipeline hole. While the subcontractor was installing the line pipe, the line pipe became lost and damaged. They submitted a claim to RLI Insurance Company for $1,567,530.09 to recover the cost of the replacement line, which RLI Insuranece Company denied.

RLI Insurance Company argued that the defendant’s loss was caused by faulty construction or workmanship excluded from coverage by the “Defects, Errors, and Omissions” exclusion of the policy, because the hole through which the line pipe was to be installed was defectively drilled. It further argued that the “ensuing loss” provision did not extend coverage to defendant’s claim because there was no separate and independent “covered peril” beyond the faulty construction that caused the loss.

Willbros Construction maintained that the policy covered the line pipe’s value, and that even if the hole was defectively drilled, the resulting damage to the line pipe is a covered loss that is not otherwise excluded.

The parties filed their respective motions for summary judgment, presenting this issue before The United States District Court for the Southern District of Texas (Houston Division), Judge Kenneth M. Hoyt presiding. The Court narrowed the issue in the following manner:

The issue is whether the line pipe constitutes ‘construction,’ as used in the polemical policy provision. Because “construction” is an ambiguous term that could have multiple meanings in the policy, the Court holds in [Willbros Construction’s] favor.

The Court reasoned that the policy’s exclusion effectively eliminated coverage for the repair or replacement of defective workmanship while maintaining coverage for damage that results from that defective workmanship.

The Court summarized it thusly,

The exclusion protects [RLI Insurance Company] from becoming the guarantor of [Willbros Construction’s] work, but it does not eliminate coverage for ensuing losses caused by defective workmanship – here, the damaged line pipe.” And after finding that in cases involving ambiguous contract terms, “the Court must ‘adopt the [interpretation] of an exclusionary clause urged by the insured as long as that [interpretation] is not unreasonable,” the Court ultimately ruled in Willbros Construction’s favor.

The real gem, however, came on the last page of the Court’s opinion. “Consequently, even if the hole was defectively drilled, the resulting damage to the line pipe is a covered loss of property separate and distinct from the allegedly defective hole. To hold otherwise, as [RLI Insurance Company] wishes, would effectively undermine [Willbros Construction’s] reason for buying insurance in the first place.” (internal citations omitted) (emphasis added).

Reasonably interpreted, the ensuing loss clause provides that if one of the specified uncovered events takes place, any ensuing loss which is otherwise covered by the policy will remain covered. The uncovered event itself, however, is never covered.

In Fiess v. State Farm Lloyds, the Texas Supreme Court resolved a long-running dispute within the state by concluding that the ensuing loss language did not restore coverage for mold loss:

To “ensue” means “to follow as a consequence or in chronological succession; to result, as an ensuing conclusion or effect.” An “ensuing loss,” then, is a loss which follows as a consequence of some preceding event or circumstance…. If we give to the language of the exception its ordinary meaning, we must conclude that an ensuing loss caused by water damage is a loss caused by water damage where the water damage itself is the result of a preceding cause.

Other courts have reached a different conclusion. In Reynolds v. Travelers Indemnity Company of America, a Kentucky court held such an exclusion pertains to “loss caused by mold, rather than loss in the form of mold.” The insureds made a claim under their policy for the theft of their refrigerator, but ensuing water damage caused mold damage that was excluded under the policy. The dispute centered on the cost to remediate the mold. The court agreed with the insureds and found coverage, “[s]ince there is no genuine issue of material fact with respect to the cause of the mold, we are satisfied that the costs associated with the removal of the mold are covered by the policy.”

In determining whether or not mold damage is excluded under an ensuing loss provision, courts often look to see if mold is the cause of damage or the result. Whether damage is covered as an ensuing loss is a fact specific question that generally must be analyzed according to the law in the jurisdiction where the claim arose.

The best honey case demonstrating how insurance coverage can exist as an ensuing loss is Roberts v. State Farm Fire & Cas. Co., 146 Ariz. 284, 705 P.2d 1335 (1985). The facts of this honey case are pretty bizarre:

. . . Roberts began finding live honeybees inside their home. A few days after this discovery, Roberts noticed that a swarm of the insects had formed on their roof. Apparently the bees had made their way through the roof and were constructing a hive in Roberts' attic. A beekeeper was consulted but due to the inaccessible location of the hive, he could not extract the queen and thereby draw off the swarm. Instead, he recommended extermination.

A few days after the bees were dispatched, Roberts noticed honey dripping into their dining room. At first, this drip confined itself to one location, but gradually it began to spread and eventually encompassed the entire room. Apparently, after the bees were exterminated, the hive began to leak.

The Roberts posed their bitter sweet dilemma to their insurer. As indicated in The Dirty Secret of Exclusions Some Major Insurance Companies Like State Farm, Allstate, Nationwide and even USAA, Do Not Want You to Think About, major insurance companies rarely advertise how often their modern "all risk" insurance policies do not pay or provide "peace of mind." State Farm denied the Roberts' claim.

The Court noted the crucial insurance coverage interpretation issue as follows:

State Farm contends that the damage to Roberts' home was due to insects and clearly excluded from coverage by the terms of the policy. Roberts, on the other hand, maintain that the loss was not due to insects, but due to the absence of insects. They claim that after the bees were exterminated the hive began to melt and only then did the honey seepage begin. They therefore conclude that this was an “ensuing loss” from insects covered through the ensuing loss provision of their policy. They concede that the actual damage done by the bees themselves, i.e., the cost of tearing out hive and accompanying repairs is not covered. They dispute, however, that the damage to their dining room is not covered.

"Ensuing loss" provisions are the "Lazarus" clauses in property insurance policies, as discussed in Water Loss Denied? Ensuing Loss Provisions May Provide Coverage. Following that logic, the Court's legal discussion is significant and provides a sweet result for policyholders:

We note that the term “ensuing loss” is nowhere defined in the policy. Both parties have agreed, however, that the word “ensuing” means “to take place afterward ... to follow as a chance, likely, or necessary consequence: RESULT ... to follow in chronological succession.” ...Webster's Third New International Dictionary, 756 (1969) definition of the word “ensue”). We note that this definition of “ensue” is not without precedent. See Aetna Insurance Co. v. Getchell Steel Treating Co., 395 F.2d 12, 16 (8th Cir.1968) (“to follow as a chance, likely or necessary consequence: to take place afterwards”). Both parties have also agreed on the meaning of certain other language within the policy: both agree that bees are insects and both agree that a loss occurred. With these agreements in mind, we focus on the disputed provision. In shortened form, it reads:

We insure for all risks of physical loss to the property ... except for loss caused by:
....
6.... [bees]....
Any ... loss [taking place afterward or following as a chance, likely, or necessary consequence] from ... [bees] ... not excluded is covered.

We do not believe this language is ambiguous. It cannot be construed in more than one sense. The plain import of this language is that the loss, due to honey seepage, is an ensuing loss and is covered by the policy, unless one of the other various exclusions applies. Unless, for example, the honey seepage caused “marring” or “settling” or any one of the numerous other exclusions. (emphasis added)

We can all crave honey and similar legal results. How about A Taste of Honey:

Florida’s Fourth District Court of Appeals was recently faced with this question in the case Certain Interested Underwriters at Lloyd’s v. Chabad Lubavitch of Greater Ft. Lauderdale, Inc., No. 4D10-762, 2011 WL 2200756 (Fla. 4th DCA June 8, 2011). A building owned by Chabad Lubavitch was damaged when a crane fell on it during Tropical Storm Barry. At the time of loss, Chabad Lubavitch had two policies on the damaged building. The first, which is involved in the case, was an “all risk” policy issued by Lloyd's. It contained the following “Windstorm or Hail Exclusion” provision:

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; or

2. Caused by rain, snow, sand or dust, whether driven by wind or not, if that loss or damage would not have occurred but for the Windstorm or Hail.

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.

The other policy covered only wind damage (“the wind policy”). Prior to making a claim under the all risk policy, Chabad Lubavitch made a claim under the wind policy for the storm damage and received the policy limits.

Chabad Lubavitch then made a claim under the all risk policy with Lloyd’s for the same storm damage. Lloyd’s filed a complaint for declaratory judgment, seeking a determination that the all risk policy’s windstorm exclusion excluded the loss since it was caused by the wind in the storm. Chabad Lubavitch countersued for breach of contract because of Lloyd’s failure to pay the claim filed under the policy. Both parties moved for summary judgment. Lloyd’s’ argument before the trial court was based on the theory that Chabad Lubavitch’s submission of the claim under the wind policy constituted an admission that the loss was caused by wind.

Chabad Lubavitch countered that the crane striking the building was the cause of damage, not wind. Chabad’s argument focused on the exception within the windstorm exclusion provision, which stated that “if the 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.” According to Chabad Lubavitch, the crane striking the building was “a cause of loss other than rain, snow, sand or dust,” resulting from wind.

The trial court concluded that the windstorm exclusion was ambiguous and should be construed strictly against Lloyd’s to cover the damage to Chabad Lubavitch’s building. Lloyd’s appealed that ruling to the Fourth District Court of Appeal. The Fourth District Court of Appeal concluded that the trial court erred in finding that the windstorm exclusion was ambiguous. The Court noted that the windstorm exclusion unambiguously provides that if a loss or damage is caused by a windstorm, the loss is not covered, regardless of any other cause or event that contributes to the loss. Contained within the exclusion is the exception to the exclusion (the ensuing loss provision), which provides that if a windstorm “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,” the loss will be covered.

The Fourth District held that the plain language of the ensuing loss provision means that if a windstorm sets in motion another cause, which is not excluded by the policy, and that intervening cause results in a covered loss, the windstorm exclusion does not apply and the loss would be covered by the policy.

Lastly, the Court noted that the parties could not agree what caused the crane to fall. The Court held that the factual determination is essential because the exclusion could only apply if the crane fell from its perch because of the wind, aided only by gravity and not some other intervening cause. For this reason, the Fourth District remanded the case to the trial court to resolve that factual issue.

This case reveals the importance of policy interpretation, and also how the facts determine coverage in first party property insurance claims. Small factual changes potentially result in drastically different outcomes in a coverage evaluation.

In the end, “it’s all about the facts Jack.”

Chabad owned a building with an “all risk” insurance policy which contained the following windstorm exclusion:

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; or

2. Caused by rain, snow, sand, or dust, whether driven by wind or not, if that loss or damage would not have occurred but for the Windstorm or Hail.

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.

As you might expect, Chabad’s building suffered a loss stemming from a windstorm; a crane fell onto the building during Tropical Storm Barry. Chabad successfully argued to the trial court that the last paragraph of the windstorm exclusion, taken as a whole, created an ambiguity, so the policy should be interpreted to provide coverage. On appeal, Lloyd’s convinced the Fourth District Court of Appeal that, for the policy to provide coverage, the windstorm must set in motion a series of events which leads to a different and covered cause of loss, such as fire.

In reaching the conclusion that there was no coverage, the majority relied on the example given in the exclusion. But one dissenting judge noticed an inconsistency between the example given and the sentence preceding it. He opined that “a crane falling on Chabad’s building is ‘a cause of loss other than rain, snow, sand or dust,’” which created ambiguity.

Although the majority sided with the insurance company, the case provides a valuable lesson. Insureds must read the policy they plan to purchase, and, if there are questions, ask the insurer (preferably in writing) so there will be no confusion regarding the coverages and exclusions.

In Malley, the homeowner had a standard Texas Dwelling Policy Form—3, insuring the house he owned in Beaumont, Texas. The house was damaged by plumbing leaks in the foundation during a 1999 freeze. Allstate denied Plaintiff’s subsequent mold claim, asserting that the policy contained an exclusion for mold damage. Plaintiff asserted that there was coverage under the “ensuing loss” provision, because it resulted from a covered event.

The policy stated:

We do not cover loss caused by:
.....
(2) rust, rot, mold or other fungi.
.....
We do cover ensuing loss caused by collapse of building or any part of the building, water damage or breakage of 349*349 glass which is part of the building if the loss would otherwise be covered under this policy.

The District Court noted that the Texas Supreme Court had not the construed “ensuing loss” provision in a policy like the one in this case, so it had to make an educated guess as to how the Texas Supreme Court would rule. However, the District Court pointed out that Texas state intermediate courts have interpreted “to ensue” as meaning “to follow as a consequence in chronological succession; to result, as an ensuing conclusion or effect.” Citing another Texas case, the Court stated that:

Ensuing loss caused by water damage refers to water damage which is the result, rather than the cause, of settling, cracking, bulging, shrinkage, or expansion of foundations, walls floors, [and] ceiling.

Applying this analysis, the Court concluded that mold damage resulting from earlier water damage, as claimed by the Plaintiff, would not be covered. “The ‘ensuing loss’ caused by water damage would refer to water damage which is the result, not the cause, of mold damage.”

The Court decided that if it were to interpret the “ensuing loss” provision so as to allow mold coverage under the circumstances in this case, it would “very nearly destroy the exclusions.” And an interpretation rendering the exclusionary clause inoperative makes “no sense.”

In short, according to the U.S. District Court for the Eastern District of Texas, if you have a mold exclusion in your insurance policy, an “ensuing loss” provision will not negate that exclusion.

Ms. Page’s all-risk policy included a general exclusion for mold, but the personal property damage section specifically noted that losses resulting from plumbing leaks were covered. State Farm argued that because the Court had previously held that an “ensuing loss” provision in the standard policy does not provide coverage for mold contamination caused by water damage that is otherwise covered under the policy, the Court should rule in its favor. Fiess v. State Farm Lloyd’s, 202 S.W.3d 744 (Tex. 2006).

However, the Court disagreed with State Farm’s interpretation of Fiess. The Court stated that even though the ruling in Fiess was broad, it could not conclude that the Fiess decision prohibited coverage for all mold damage no matter the cause, as State Farm claimed. The Court pointed out that it specifically mentioned that the Fiesses failed to preserve a claim for mold caused by plumbing and air conditioning leaks.

The Texas Supreme Court stated that although the mold exclusion did not apply to the personal property provisions of the policy--because loss caused plumbing leaks was specifically included--it did apply to coverage for damage to the dwelling because that was specifically excluded.

This case just goes to show you that interesting rulings that may seem counterintuitive at first brush are usually backed by persuasive logic and reasoning. We may not always agree with a court’s decisions, but at least we get the opportunity to review why the court ruled the way it did.

First, I am merely paraphrasing the lecture. Order the video from NAPIA to fully appreciate the concepts.

Second, I will be discussing some case law regarding these issues over the next several weeks. Judges, not lecturers, decide what is and is not covered. Real life results and case examples are important.

Still, Eshoo made the following notation in his lecture regarding how the all risk policies work when faced with structural losses allegedly caused by a defective product, such as Chinese drywall:

A resulting loss is covered even if a defective product is a "but for" cause of the loss. The intent of the exclusion and exception is to exclude only that portion of the loss attributable to the defective product. In other words, losses that are defective products are not covered, while those losses that result from the defective product are covered.

The exclusion and exception, read together, operate to eliminate the conduct or defect from consideration in analyzing the cause of resulting damage; only the actual risk causing the resulting physical damage is subject to the coverage analysis.

To the extent that cause is neither excluded nor excepted in the applicable policy, coverage exists for the damage which resulted from the defective product.

This is an excellent phrasing of how the "ensuing loss" provision works. I suggest that others seeking coverage adopt it rather than some of the convoluted discussions by courts.

The factual and legal burden of proof to demonstrate that a loss occurs within the language of an all risk policy was properly described as follows:

An insured seeking to recover under an "all risks" insurance policy merely has the burden of proving only that direct physical loss or damage occurred to covered property while the policy was in force.

Once the insured establishes a loss apparently within the terms of an "all risks" policy, the burden shifts to the insurer to prove that the loss arose from a cause which is excluded.

The insured is not required to disprove any excluded cause of loss.

...

Exclusion clauses are generally considered contrary to the fundamental protective purpose of insurance. Thus, the courts give a strict interpretation to exclusion clauses, as opposed to the liberal interpretation afforded coverage protections.

I will analyze these principals in greater detail later as they relate to Chinese drywall and how other defective building materials contribute to losses covered under all risk policies. But, the phraseology of the concepts is excellent and should be adopted by all consumer advocates.

At page Q&A-1521, the editors had the following coverage discussion:

"What ISO policy exclusion under an HO3, if any, applies to a product defect? We have seen a couple of instances in Louisiana where the insureds are sustaining damage as a result of defective drywall made in China. This was used following Katrina to replenish shortages of drywall supplies."

The answer is very telling and provides hope to policyholders with these problems:

"The ISO HO 03 excludes loss to coverages A & B caused by faulty materials used in repair, construction renovation or remodeling. (See page 12 of the 10 00 policy.) Any ensuing loss as a result of the faulty drywall would be covered, for example if the drywall caused corrosion damage to wires or pipes."

This analysis is helpful, but each policy has to be examined carefully. As recently indicated in my post, “Is the State Farm Policy Worth Anything?” and my reply to Sandy Burnette's comment, “The Dirty Secret of Exclusions Some Major Insurance Companies Like State Farem, Allstate, Nationwide and Even USAA, Do Not Want You to Think About,” every policy has a little different language that can be significant.

I suggest that those with Chinese drywall problems read "Solving the Chinese Puzzle of Contaminated Drywall: Owners and Builders Seek Redress for Defective Drywall Installed in Homes" as a basic reference for the expected coverage issues.

Tens of thousands of residential structures are affected, as well as  condominiums, apartments and commercial structures. Homeowner’s and commercial "all-risk" policies may have a number of triggers for damage, but the primary exclusions which may affect coverage are noted in this article:

"There are a number of exclusions, however, that can make the coverage for defective drywall claims problematic. For example, losses caused by the following perils are typically excluded:
• Wear and tear, marring, deterioration
• Inherent vice, latent defect, mechanical breakdown
• Smog, rust, mold, wet or dry rot
• Release, discharge or dispersal of contaminants or pollutants
• Settling, cracking, shrinking, bulging or expansion of pavements, patios, foundations, walls floors, roofs or ceilings."

The discussion of the exclusions suggests that the authors believe homeowners all-risk policies will face significant coverage issues:

"Deterioration’ is a gradual decline or reduction in a property’s value resulting from a decline in physical condition. It can be caused by action of the elements or by ordinary wear and tear. A ‘latent defect’ is customarily one that cannot be discerned by a normal inspection of the property by its owner and must be identified by an expert’s investigation. It could be argued that this type of exclusion is applicable to the defective drywall claims, since the material appears normal to the layperson but can be identified as defective by a consultant’s investigation or by analysis of its composition. ‘Inherent vice’ is a condition in an insured property that has the potential to cause damage to portions of the property other than the part containing to portions of the property other than the part containing the inherent vice.

The Chinese drywall, it may be argued, exhibits this property since gases emitted from the drywall have been alleged to cause corrosion of metals, including the wiring, plumbing and air conditioning coils in homes where it has been installed. In some cases, the pollution exclusion in a homeowners policy may arguably apply to the release of harmful gases from the drywall that are damaging plumbing, wiring, heating and air conditioning systems, appliances, computers and electronic equipment. Even the odor may be regarded as a release of a pollutant or contaminant, although it is not clear that the incorporation of pollution exclusions in property damage policies was intended to apply to releases that are contained within the insured structure and involve non-industrial materials. Counterarguments can be made that the pollution exclusion should apply only to releases of hazardous materials that impact the environment, but not to damage to the structure, building materials or furnishings within a structure.

Some homeowners policies also contain exclusions for construction defects. This exclusion is included with the thought that an alternative course of action is available to the homeowner: an action for breach of warranty against the contractor and subcontractors that built the home. Even where this exclusion is not included in the policy, some courts have denied coverage for defective construction or materials claims, since damage to the drywall did not occur during the policy period – it was already defective when it was installed and is in the same condition when the problem is discovered. Other courts have concluded that there is no occurrence or event giving rise to the alleged loss where the defective material is unchanged from when it was installed. The damage to the plumbing, wiring, air conditioning, appliances and computers may be excluded as deterioration (e.g., gradual damage), or as rust or corrosion. There are, however, jurisdictions that regard the installation of the defective drywall as an ‘occurrence’ and consider the damage to be ongoing during the term of the policy even though the defective material itself may not be altered after its installation.

In summary, homeowners policies are not likely to respond to the costs of tearing out and replacing the defective drywall. And although they might pay for the ensuing loss to the wiring, plumbing, air conditioning and appliances, there is no guarantee, however, as these losses may also be impacted by exclusions for mechanical breakdown."

The last sentence is discouraging. Many insurance defense attorneys have confided some concern regarding the "ensuing loss" provisions of some policies. "Ensuing loss" provisions are the Lazarus clauses in property insurance policies. I strongly suggest you read Water Loss Denied? Ensuing Loss Provisions May Provide Coverage and consider how the various Chinese drywall fact patterns may impact possible coverage. I also strongly suggest you determine what local building and safety codes apply, and then carefully read the Ordinance and Law coverage and endorsements of the policy at issue.

So, what is the answer? While I like to be certain rather than give wimpy answers, it depends on the policy, the law that applies, and the facts of the loss. Some Chinese drywall is not as bad as other Chinese drywall. The particular facts of each case and causation issues first determine what exclusions, limitations and exceptions may apply.

I suggest you ask these questions when making the analysis:

• What is the problem with the drywall?
• How will it be fixed and what non-drywall areas will be impacted?
• What problems from the drywall are causing damage to other areas of the structure and what are those damages to the non-drywall areas?
• What exclusions and ensuing loss provisions may apply?
• What laws or ordinances regulate the need to replace or affect the method of repair?
• What state law applies?

I do not want to give away too much of my analysis to the bright defense attorneys reading this post. However, for those who opine there is no coverage, we all know some attorneys who give opinions like that and then later blame judges when it turns out they were wrong.

One thing is certain--there are a lot of these cases and the insurance industry is not advertising for cliams to be turned in. There will be litigation on these issues.