Preparing for a presentation at the March 2011 ABA, Insurance Coverage Litigation Committee's seminar, my Lexis search function is set to find cases on ensuing loss. One such find was TMW Enter., Inc. v. Federal Ins. Co., 619 F.3d 574 (6th Cir. 2010).
TMW purchased a recently constructed condominium and retail building. TMW insured the property for $10 million with an all-risk policy from Federal Insurance. The policy covered any "direct physical loss or damage" to the property unless "caused by or resulting from" an excluded peril. The policy excluded coverage for "loss or damage . . . caused by or resulting from . . . faulty . . . workmanship . . . [or] construction." The exclusion did not apply, however, "to ensuing loss or damage caused by or resulting from a peril not otherwise excluded."
When TMW started renovations to the building, they discovered the original builder had improperly constructed the exterior walls, leaving them vulnerable to water infiltration. Water had entered the building, weakening the structural integrity of the building by corroding its steel structure. TMW spent more than $3.9 million to repair the building.
When TMW tendered to Federal, coverage was denied because damage caused by "construction defects" and "wear and tear" was excluded. When TMW filed suit, the district court granted summary judgment to Federal.
On appeal, TMW argued that although faulty workmanship allowed water to seep into the walls of the building, intruding water caused damage. Water-related damage was not otherwise excluded, making it an "ensuing loss" that was covered. The court disagreed. TMW's chain of reasoning - that the water technically was the final causative agent of the damage, as opposed to the faulty construction, that "water damage" was not specifically excluded from the policy, that coverage accordingly applies- essentially eliminated the exclusion. Instead, the ensuing loss provision established that damages occurring later in time "caused" by "a peril not otherwise excluded" remained covered.
The case was remanded, however, to allow TMW the opportunity to demonstrate that some losses may have occurred that were not proximately caused by faulty workmanship, and thus were potentially covered as an ensuing loss.
