An ensuing loss clause within an insurance policy operates to preserve coverage when a loss excluded under a policy results in a subsequent or “ensuing” loss that otherwise would be covered.
While ensuing loss clauses are well recognized in Maryland case law, the scope of ensuing loss clauses has never been determined by Maryland appellate courts. In a recent case, a Maryland federal court was tasked with predicting how the Maryland’s highest court would rule on the unsettled issue of whether an ensuing loss clause applies to a covered loss that is causally related to an excluded peril, or applies only when the covered loss is a result of an independent or superseding event.
In that case,1 a hotel sustained losses due to a windstorm in September of 2018. The hotel submitted a claim to its commercial property insurer seeking to recover costs incurred to repair the hotel’s roof and for interior water damage, as well as for lost business income. The insurer denied the claim on the ground that the roof was defective and, therefore, the losses were subject to the policy’s exclusion for faulty workmanship.
In support of its denial, the insurer retained an expert who concluded that a portion of the hotel’s roof system “peeled back” during the storm mainly because of the improper installation of the roof system during the construction of the hotel three years prior. According to the insurer, the ensuing loss clause within the policy2 did not apply because the windstorm was not an independent cause of any property damage. Instead, the insurer maintained that faulty workmanship was solely to blame for the losses because, but for the defective roof, the storm would not have damaged the hotel.
While the hotel did not dispute its roof was defective, it maintained the damage was caused by an insured peril (i.e.</em?, the windstorm) that occurred subsequent to, and was distinct from, the defective roof. Thus, the ensuing loss clause should require the insurer to cover all of the hotel’s losses that were traceable to the storm.
The court ultimately predicted that Maryland law favors a broad construction of the ensuing loss clause that did not require an independent or superseding event. According to the court, the damage caused by the windstorm that occurred subsequent to the faulty installation of the roof was a covered ensuing loss. However, the court found that the faulty workmanship exclusion barred coverage for the cost to repair or replace the hotel’s defective roof.
1 Bethany Boardwalk Grp. LLC v. Everest Sec. Ins. Co., No. 18-3918, 2020 WL 1063060 (D. Md. Mar. 5, 2020).
2 The ensuing loss clause within the subject policy provided that the insurer “will not pay for loss or damage caused by or resulting from” faulty workmanship, “[b]ut if [faulty workmanship] results in a Covered Cause of Loss,” the insurer “will pay for the loss or damage caused by that Covered Cause of Loss.”