by John Riper Ashbaugh Beal
On May 17 the Washington Supreme Court issued a unanimous decision on a case that the construction industry has not only been watching carefully but also directly participated in. Ahlers & Cressman’s John Ahlers and I briefed and argued the case to the Supreme Court as amicus counsel on behalf of AGC of Washington and other contractor industry groups.
When unexpected events on a project cause a loss contractors want to know that they are getting all the coverage that is promised in the insurance that they’ve purchased. Last week’s Supreme Court case involved an insurance company denying an insurance claim because of a hotly contested interpretation of policy exclusions that are common in contractor insurance policies. If the insurer’s interpretation held up it would effectively reduce the coverage afforded to all contractors under the policies that they have paid for.
The case known as Vision One involved the collapse of a shoring system during construction. The collapse happened because the shoring system design was at best marginal for supporting a concrete slab pour and its capacity was further compromised by faulty installation. The scaffolding collapse destroyed the curing concrete rebar and framing. Cleanup and reconstruction of the collapsed slab took several weeks’ work.
The contractor submitted the loss to its insurer. The insurer denied coverage saying that the entire loss was solely due to the combination of faulty design and faulty workmanship. The insurance policy excluded loss for faulty design and it also excluded loss for faulty workmanship. But the ‘faulty workmanship’ exclusion had an important exception: Any resulting loss from faulty workmanship that was not otherwise excluded from coverage would in fact be covered.
The insured contractor disputed the denial of coverage. The insured sued its carrier asserting that the collapse was a covered loss under the policy. The insured specifically contended that because of the ‘resulting loss’ provision the ‘faulty workmanship’ exclusion didn’t exclude any of the collapse damage: The destroyed concrete pour the damaged rebar and forms and the costs of cleanup and replacing those portions of the property. At most the contractor argued the faulty workmanship exclusion would exclude the damage to the defectively designed and installed shoring system itself but not the resulting loss.
The case went to trial and the contractor prevailed in getting $724605 for damage and delay costs from the concrete collapse plus additional damages for insurer bad faith due to the denial of coverage. The insurer appealed to the court of appeals which reversed the contractor’s judgment. The contractor along with the AGC asked the Supreme Court to review the case and the Supreme Court agreed.
The case ultimately hinged on three issues. First whether there was coverage on the theory that the ‘resulting loss’ exception to the ‘faulty workmanship’ exclusion applied to the loss allowing coverage. Second whether the insurer could change the rationale for its coverage denial to a new theory that the insurer developed during its litigation with its insured. And third whether a judicial doctrine for interpreting insurance policies known as the ‘efficient proximate cause rule’ could be invoked by the insurer to deny coverage.
The Supreme Court ruled in favor of the contractor on all three of those issues.
On the first issue the Supreme Court declared that the ‘resulting loss’ provision meant that where loss caused by faulty workmanship resulted in a loss or peril not otherwise excluded then the resulting loss was covered even though repair of the faulty workmanship would not be covered. The court observed that collapse was not excluded from the policy and therefore was a covered peril. Because the insurer itself had declared that the concrete slab collapse resulted from faulty workmanship during installation of the shoring the Supreme Court affirmed coverage for the damage caused by that collapse.
The insurer tried to get around the ‘ensuing loss’ issue by arguing that its policy excluded coverage not only when an excluded event “directly and solely” caused a loss but also when an excluded event (such as defective design) merely “initiates a sequence of events that results in loss or damage.” The insurer argued it ought to get a trial over whether coverage was excluded based on the “initiates a sequence of events” language in its exclusions. The Supreme Court rejected that argument because when the insurer had denied the claim it had done so on the basis that excluded perils were the sole cause of the loss not on the theory that they merely initiated a sequence of events that led to the loss. In effect the Supreme Court declared that an insurer cannot change theories for a denial after the insurer has declared its coverage position.
In order to get around its failure to explicitly declare its “initiates a sequence of events that results in loss or damage” language as a basis for denying coverage the insurer argued that it was entitled to trial over what the actual cause of the loss was under a legal doctrine known as the efficient proximate cause rule. The insurer argued that if a jury determined that an excluded peril such as defective design was the efficient proximate cause of the loss then there would be no coverage regardless of what the insurer had said in its denial letter and regardless of the ‘resulting loss’ issues. But the Supreme Court rejected that argument.
The efficient proximate cause rule is a judicially-created doctrine that exists to establish coverage not to deny coverage where the terms of the policy promise coverage. The rule provides that when a loss results from a chain of causes then if the ‘efficient proximate cause’ of the loss (often defined as the peril that sets other causes into motion which in an unbroken sequence produce the loss) is a covered peril then the loss is covered even if excluded perils are also present in the chain of causation. In the Vision One decision the Supreme Court rejected the insurer’s attempt to use the efficient proximate cause rule as a tool for rejecting coverage. The Court emphasized that where the efficient proximate cause is a covered peril then the loss is covered. But if the efficient proximate cause is an excluded peril that does not necessarily mean that coverage is excluded.
John Riper and John Ahlers who briefed and argued the case as amicus counsel on behalf of the AGC are both members of the AGC’s Legal Affairs Committee.