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A win for AGC: State Supreme Court preserved coverage for contractors under builder’s-risk policies

A win for AGC: State Supreme Court preserved coverage for contractors under builder’s-risk policies

Courtesy of AGC Legal Affairs Committee member Todd Hayes of Harper Hayes PLLC.

AGC of Washington recently filed a “friend of the court” brief in an insurance coverage dispute before the Washington Supreme Court.  The Gardens Condominium v. Farmers Insurance Exchange involved an “all-risk” insurance policy—the same kind of coverage typically found in builder’s risk policies.  Rather than promising to insure against particular perils (e.g., fire, windstorm), the policy in The Gardens stated that the insurer would pay for any kind of physical damage that the policy did not expressly exclude.  Although The Gardens policy excluded “faulty construction,” it did not exclude “condensation” (which the policyholder therefore argued was a peril covered by the policy). 

The primary issue in the case was how to interpret a “resulting loss” clause within the faulty construction exclusion.  It stated, “We will not pay for loss or damage caused by [faulty construction].  But if loss or damage by a Covered Cause of Loss results, we will pay for that resulting loss or damage.”  “In other words,” said the Court, “if faulty workmanship causes a covered peril to occur and that covered peril results in loss or damage, the loss or damage will be covered.”  The policyholder (who AGC was supporting) argued that damage to the roof of its building was covered because faultily-constructed sleepers had allowed condensation to build up in the roof cavity, damaging the roof assembly.  The insurance company argued that the damage was excluded because the policy stated that damage “[would] be considered to have been caused by an excluded event if the occurrence of that event . . . initiate[d] a sequence of events that result[ed] in loss or damage, regardless of the nature of any intermediate or final event in that sequence.”  That is, because faulty construction initiated the chain of events that led to the damage, the damage was excluded, regardless of whether “condensation” had a role.

The Supreme Court sided with the policyholder, ruling that if the policy did in fact cover “condensation” (it left that question to the trial court to decide), then the resulting loss clause would preserve coverage for the condensation damage that resulted from the faulty construction:

The parties agree that faulty workmanship exists here: failure to add enough space for adequate ventilation in the roof redesign and repair.  This faulty workmanship resulted in potentially covered perils (condensation and water vapor) causing loss (water-related damage to other parts of the roof).  If condensation and water vapor are new and distinct perils and the loss to the roof components (other than those defectively constructed) is a separate ensuing loss, the policy provides coverage, assuming condensation and water vapor are also covered perils.

In so holding, the Supreme Court rejected the insurer’s argument that a resulting loss clause does not apply to “natural consequences of an excluded peril,” or that the resulting loss cannot be a “natural and unavoidable byproduct” of the excluded peril.  The Court also noted that if the insurer did not want resulting losses to be covered, it could have simply drafted a faulty construction exclusion without a resulting loss clause: “Farmers could have drafted the policy differently to ensure that the entire causal chain resulting from an excluded peril would be excluded by not including a resulting loss exception . . . .”

The Gardens case is significant for AGC members because many builder’s risk policies contain the same resulting loss and “initiates” language at issue in that case.  For example, one of the builder’s risk cases cited in The Gardens involved the (covered) “collapse” of a concrete slab that was the result of (excluded) “faulty construction” of the underlying scaffolding.  Had the insurance company in The Gardens prevailed, that kind of resulting “collapse” loss—or even a resulting fire—would no longer be covered.  In short, the policyholder’s win in The Gardens preserved coverage for contractors under builder’s risk policies.  

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