by Jennifer Dinning | Jan 9, 2023 | Blog News
On December 19, 2022, in The Gardens Condo. v. Farmers Ins. Exch., 83678-1-I, the Washington Court of Appeals, Division One, held that the ensuing loss provision contained in an exclusion for faulty design and construction preserved coverage for resulting losses that are caused by a covered cause of loss, reversing the trial court’s summary judgment ruling in favor of Farmers and remanding for further proceedings.
The insured, Gardens Condominium, is a 26-unit condominium building in Shoreline. In 2004, Gardens had roof repairs performed to correct inadequate ventilation. In 2019, Gardens discovered the 2004 repairs were defective, and that water vapor emitted from inside the units continued to be trapped in the roof joist cavities, allowing condensation to form during cool weather and overnight temperature drops. That repeated exposure to moisture damaged the sheathing, fireboard, joists, and sleepers.
Gardens held an all-risk insurance policy from Farmers, which covered all “direct physical loss or damage” to the building not specifically excluded by the policy. The policy excludes coverage for damage caused by faulty design or repair, but the exclusion contains an ensuing loss provision, which states: “But if loss or damage by a Covered Cause of Loss results, we will pay for that resulting loss or damage.”
Farmers denied coverage because faulty construction “initiated a sequence of events resulting in the loss or damage.” Gardens objected to Farmers’ denial of coverage, contending that the resulting loss clause narrowed the faulty workmanship exclusion, preserving coverage for damage caused by a resulting covered peril, and that the policy covers the perils of humidity and condensation.
Gardens sued Farmers for breach of contract and declaratory relief. Gardens and Farmers cross-moved for summary judgment. The parties stipulated to key facts, including that the damage to the roofing assembly “was caused by condensation and/or excess humidity resulting from inadequate ventilation of the roof assembly due to the faulty, inadequate, or defective construction, repairs, and/or redesign.”
The trial court granted summary judgment for Farmers, concluding that the policy excludes coverage because faulty construction began a sequence of events that resulted in the damage, and the resulting loss clause exception did not “somehow resurrect[ ]” coverage. The Court of Appeals reversed on de novo review, finding that the trial court misinterpreted the ensuing loss provision.
Citing Vision One, 174 Wn.2d 501, 276 P.3d 300 (2012), the Court of Appeals found that the ensuing loss provision contained in the Farmers policy preserved coverage for resulting damage caused by a covered cause of loss. Thus, if the policy covers the perils of condensation and excess humidity, it covers the loss or damage from those perils. The Court of Appeals also noted that, although an ensuing loss otherwise covered by the policy remained covered, the uncovered event – in this case faulty construction – is never covered.
Relying on citing Vision One, Farmers argued that the Court should apply an “efficient proximate cause” analysis to the ensuing loss to determine whether the damage at issue flows from an excluded event, preventing coverage. The Court of appeals rejected this argument, noting that Farmers’ reference to the term “inverse efficient proximate cause” in Vision One was taken out of context and misapplied.
Farmers also argued that the ensuing loss provision should be interpreted to apply to losses from “only unforeseen covered events, occurring independent of the excluded peril”, citing TMW Enterprises, Inc. v. Federal Insurance Co., 619 F.3d 574 (6th Cir. 2010). Farmers argued that failure to do so would allow the ensuing loss provisions to “swallow the faulty workmanship exclusion whole.” The Court of Appeals rejected this argument as inconsistent with Washington law, citing Vision One, 174 Wn.2d 501, 276 P.3d 300 (2012) and Sprague v. Safeco Ins. Co. of Am., 174 Wn.2d 524, 529, 276 P.3d 1270 (2012). The Court of Appeals also noted that Farmers’ interpretation would render the ensuing loss provision superfluous.
Finally, Farmers’ argued that Gardens was not seeking coverage for an “ensuing loss”, but just for “the loss”, citing Sprague, 174 Wn.2d at 527, 276 P.3d 1270 (2012). The Court of Appeals rejected this argument, stating that, in Sprague, all the causes of the loss at issue were subject to exclusions, and thus the policy did not provide coverage under the ensuing loss provision in question. Here, the parties stipulated that the perils of condensation and excess humidity caused the roof damage, but they dispute whether Farmers’ policy covers those perils.
The Court of Appeals remanded the case for further proceedings consistent with its ruling that the ensuing loss provision contained in the exclusion for faulty design and construction preserved coverage for resulting losses that are caused by a covered cause of loss.
The Gardens Condo. v. Farmers Ins. Exch., ____ P.3d _____ (Wash. Ct. App. Dec. 19, 2022).
Disclaimer: the opinions expressed in this blog are those of the author and do not necessarily reflect those of Soha & Lang, P.S. or its clients.
by Jennifer Dinning | Feb 19, 2020 | Blog News, Publications
On February 11, 2020, in the matter of CLMS Mgmt. Servs. Ltd. P’ship v. Amwins Brokerage of Georgia, LLC, 3:19-CV-05785-RBL (W.D. Wash. Feb. 11, 2020), the US District Court in the Western District of Washington granted certification pursuant to 28 U.S.C. § 1292(b) of the court’s earlier order of December 26, 2019, in which the court held that the Convention on the Recognition of Foreign Arbitral Award, Art. II, Sec. 3 is “self-executing,” and not subject to preemption under the McCarran-Ferguson Act – and thus not preempted by Washington statute.
The Court’s Order, granting defendant’s motion to enforce an arbitration clause in the policy of insurance at issue, analyzes the interplay between the Federal Arbitration Act (FAA), the McCarran-Ferguson Act, and Art. II, Sec. 3 of the Convention. Although the FAA normally governs the enforceability of arbitration clauses, in the insurance context the McCarran-Ferguson Act, which creates a system of “reverse-preemption” for insurance law, must also be considered. The Court examined decisions by Washington state courts holding that, under the McCarran-Ferguson Act, Wash. Rev. Code 48.18.200 – which prohibits the enforcement of arbitration provisions in insurance contracts – preempts Chapter 1 of the FAA.
However, the Western District of Washington held that the same is not true of Chapter II of the FAA and ruled that Chapter II section 3 is self-executing, and thus not subject to preemption under the McCarran-Ferguson Act. The court found the reasoning of the US District Court for the Central District of California’s reasoning in the matter of Martin v. Certain Underwriters of Lloyd’s, London, to be persuasive. There, the court stated that Section 3’s use of “the verb ‘shall’ . . . expressly directs courts to enforce arbitration agreements” and thus gives Section 3 “automatic effect.”
In granting certification for immediate review, the Western District recognized that federal circuits are split and there is “considerable disagreement between courts around the country about whether and why the Convention preempts state laws like RCW 48.18.200,” and that the Ninth Circuit has not ruled on this issue. Accordingly, this will be a matter of first impression for the Ninth Circuit.
Disclaimer: Any opinions expressed in this blog are those of the author and do not necessarily reflect those of Soha and Lang, P.S. or its clients.
by Jennifer Dinning | Oct 10, 2019 | Blog News, Publications
The Washington Supreme Court issued a decision on October 10, 2019 in the matter of T-Mobile USA, Inc. v. Selective Ins. Co. of Am., No. 96500-5 (2019), finding that an insurance company is bound by its agent’s representations made on a certificate of insurance, despite the disclaimer language contained in the certificate of insurance, even when those representations add new insureds to the policy or otherwise alter its terms.
The matter came to the Washington Supreme Court on certification from the Ninth Circuit, which presented the following question: “Under Washington law, is an insurer bound by representations made by its authorized agent in a certificate of insurance with respect to a party’s status as an additional insured under a policy issued by the insurer, when the certificate includes language disclaiming its authority and ability to expand coverage?” The Washington Supreme Court answered the question in the affirmative, holding that “an insurance company is bound by the representation of its agent in those circumstances.”
The Court cited to the rule of textual interpretation that the specific prevails over the general, and thus found that the general disclaimers in the certificates of insurance are ineffective and are superseded by the specific information written on the certificate. The Court also found that public policy supports enforcing the representations of an insurance company’s agents.
The Court distinguished this decision from its ruling in Postlewait Constr., Inc. v. Great Am. Ins. Co., 106 Wn.2d 96, 100-01 & n.7, 720 P.2d 805 (1986), in which the Court stated that “[T]he purpose of issuing a certificate of insurance is to inform the recipient thereof that insurance has been obtained; the certificate itself, however, is not the equivalent of an insurance policy” on the grounds that the broker in Postlewait was not the agent of the insurance company, and that the certificate of insurance at issue did not represent that the purported additional insured was in fact an additional insured.
Two justices dissented. While accepting the possibility that equitable estoppel could apply in some circumstances, that was not the case here where the entity seeking coverage, T-Mobile USA, was a sophisticated business entity and there was never any agreement that the insurance would cover it.
Disclaimer: Any opinions expressed in this blog are those of the author and do not necessarily reflect those of Soha and Lang, P.S. or its clients.
by Jennifer Dinning | Sep 9, 2019 | Blog News, Publications
In the matter of Belmain Place Condominium Owners Association v. American Insurance Company, 2:19-cv-00156-MJP (W.D. Wash., September 4, 2019) the Washington federal district court denied an insured/plaintiff’s motion for summary judgment on coverage related to water damage to a condominium. Based on the “inverse proximate cause” language found in the “Washington Changes — Excluded Causes of Loss” form, the Court rejected the insured’s argument that if water intrusion damage is not specifically excluded, it is always covered under an ensuing loss provision.
The Court explained that the Washington Supreme Court expressly allowed for “inverse proximate cause” language in Vision One, LLC v. Phila. Indemn. Ins. Co., 174 Wn.2d 501 (2012) and distinguished this matter from another Western federal district court decision that addressed different policy language.
Notably, the decision also states that “Plaintiff’s position has the potential to swallow the exclusions in an all-risk policy whole.”
by Jennifer Dinning | Apr 19, 2019 | Blog News, Publications
In the matter of Massachusetts Bay Ins. Co. v. Walflor Industries, Inc. et al, 2:18-cv-00791-JLR (W.D. Wash., April 17, 2019), the Washington federal district court upheld a defense cost reimbursement provision, rejecting the argument that such provisions are void as a matter of public policy.
The provision, contained in a separate endorsement titled “WASHINGTON CHANGES – DEFENSE COSTS,” provides:
The following applies to any provision in this Policy, or in any endorsement attached to this Policy that sets forth a duty to defend:
If we initially defend an insured or pay for an insured’s defense but later determine that none of the claims, for which we provided a defense or defense costs, are covered under this insurance, we have the right to reimbursement for the defense costs we have incurred.
The right to reimbursement under this provision will only apply to the costs we have incurred after we notify you in writing that there may not be coverage and that we are reserving our rights to terminate the defense or payment of defense costs and to seek reimbursement for defense costs.
The court found support for the reimbursement provision in Nat’l Sur. Corp. v. Immunex Corp., 176 Wn.2d 872, 297 P.3d 688 (2013), noting that the Immunex Court stated that to “allow[] recoupment to be claimed in a reservation of rights letter would allow the insurer to impose a condition on its defense that was not bargained for.”
The court found no basis for invalidating the endorsement on public policy grounds and held that Massachusetts Bay is entitled to recoup the defense costs it paid in the underlying lawsuit pursuant to the endorsement.
