SDV Insights

The "ensuing loss" clause is a provision that restores coverage for property insurance claims that are subject to certain policy exclusions, such as “faulty workmanship” and “faulty design.” It applies in cases where there is damage from a covered cause of loss that ensues, or results from, the excluded cause of loss. Courts across jurisdictions have grappled with interpreting the breadth of this clause, leading to varying conclusions regarding its scope and applicability. One of the primary challenges in interpreting “ensuing loss” lies in determining the ultimate cause of damage. Courts must ascertain whether the ensuing loss is sufficiently distinct from the excluded event to warrant coverage under the policy. This analysis often hinges on whether the cause of loss is thought to constitute a separate and independent occurrence or is merely a continuation or exacerbation of the excluded event.

The Supreme Court of Washington has recently offered its assessment of the standard “resulting loss” (or “ensuing loss”) exception in the case of Gardens Condo v. Farmers Rich Ins. Exchange.¹ In such a case, the court applied a broad reading of this provision to hold that it revives coverage for losses caused by covered perils, regardless of whether the resulting loss was a natural consequence of the excluded event (i.e., part of a continuous chain of causation).

The facts involved an insured, Gardens Condominium (“Gardens”), who discovered water damage to its condominium's roof in 2002 caused by faulty design and construction. Repairs were undertaken in 2003-2004, including a redesign to improve ventilation/avoidance of condensation. Many years later, in 2019, additional roof damage was discovered due to inadequate ventilation. Gardens sought coverage for the resulting water damage under its property insurance policy, but the insurer, Farmers Insurance Exchange (“Farmers”), denied the claim, citing the policy’s faulty workmanship exclusion. Gardens argued that the resulting loss exception to the exclusion applied because the claimed damage was from water condensation that ensued from the improper ventilation of the roof system. The insurer contrarily asserted that the resulting loss exception did not apply because the condensation was a natural consequence (did not disrupt the chain) of the faulty work. Gardens filed suit, and the trial court granted summary judgment in favor of Farmers. The Court of Appeals reversed this decision, and the Washington Supreme Court took up the matter. In affirming the holding of the Court of Appeals, finding that the “resulting loss” exception applied, the Washington Supreme Court stated:

Farmers argues that the resulting loss exception does not apply to natural consequences of an excluded peril and, relatedly, that condensation is not a new peril because it is the “natural and unavoidable byproduct of the faulty lack of ventilation.” . . .The resulting loss exception to the faulty workmanship exclusion states that Farmers will pay for loss or damage caused by a covered cause of loss resulting from faulty workmanship. It does not state that the covered cause of loss must be independent from the faulty workmanship or that it cannot be a natural consequence of faulty workmanship. Because the language of the exception is clear, we will not rewrite it by adding requirements. Consistent with our principles of interpretation, exclusions are strictly construed against the insurer.

Looking forward, the Washington court further pointed out that insurers are free to draft policies without resulting loss exceptions or limit their scope if they wish to exclude entire causal chains resulting from excluded perils.

The case highlights the significance of resulting loss clauses in maintaining insurance's fundamental purpose: protecting against unforeseen risks. The Washington Supreme Court's analysis of this clause reinforces established rules in insurance interpretation, such as construing policies as a whole and harmonizing conflicting clauses. However, policyholders should take caution that court opinions vary. In New Hampshire, for example, the state’s supreme court has applied a much narrower view of the “ensuing loss” provision, emphasizing the need for significant attenuation between the initial excluded defect and the ultimate cause of loss, rejecting an argument that damage from mold contamination constituted an ensuing loss separate from the initial defect that caused the mold. Thus, the dichotomy between excluded loss and ensuing loss remains an issue of wide debate.

Watch this space for additional insight into this matter and its implications for insurance law. For more information on these coverage issues, please contact David Jordan (DJordan@sdvlaw.com) or William Phillips (WPhillips@sdvlaw.com).

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¹Gardens Condo. v. Farmers Ins. Exch., 544 P.3d 499, 502 (Wash. 2024).