It's Covered

On March 14, 2024, the Washington Supreme Court confirmed that an all-risk policy provides coverage for losses or damages caused by a covered peril, even if an excluded peril causes the covered peril to occur in the first place. In The Gardens Condominium v. Farmers Insurance Exchange, 2024 WL 1100749 (Wash. 2024) (en banc), the court held that coverage existed even though faulty workmanship (an excluded peril) caused water condensation (a covered peril) to occur, resulting in a covered loss under the policy. 

The insurance dispute between Farmers and Gardens Condominium arose when the insured sought coverage for damage to the condominium’s roof sheathing, fireboard and joints. The damage was caused by water vapor and condensation becoming trapped between the roof surface and ceiling because of defectively installed sleepers on top of the joists. Farmers denied coverage based on the faulty workmanship exclusion.  

The policy issued by Farmers included a faulty workmanship exclusion, but also contained a resulting loss exception that preserves coverage for loss or damage caused by a covered peril. Gardens Condominium filed a declaratory judgment action seeking coverage for the water damage to the roof sheathing and fireboard. However, the insured did not seek coverage for the cost of repairing the faulty workmanship itself—namely, the defective sleepers that had been installed to increase ventilation and eliminate condensation. The insured only sought coverage for the resulting loss that occurred because condensation was allowed to occur as a result of the faulty workmanship. 

In reviewing coverage, the Washington Supreme Court examined its prior holdings in Vision One, LLC v. Philadelphia Indemnity Ins. Co., 276 P.3d 300 (Wash. 2012) (en banc) and Sprague v. Safeco Ins. Co. of America, 276 P.3d 1270 (Wash. 2012) (en banc), both of which addressed the resulting loss exception in different contexts. The Gardens Condominium decision provides further clarification for the application of the resulting loss exception in an all-risk policy.

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Relying on Vision One, the court confirmed that “[r]esulting loss clauses preserve coverage for loss that ensues after an excluded event if it would otherwise be covered by the policy.” The resulting loss exception serves the primary purpose of maintaining coverage for losses caused by covered perils (e.g., collapse or condensation), even if that covered peril occurs because of an excluded peril such as faulty workmanship. The covered peril does not have to be independent from the faulty workmanship or excluded peril. As such, a court will find coverage where a loss is caused by a covered peril regardless of the faulty workmanship exclusion. 

In contrast, the court found that an insured in the earlier Sprague decision was not entitled to coverage under its policy because the loss at issue was caused by an excluded peril (rot) that occurred because of another excluded peril (faulty workmanship). A resulting loss caused by an excluded peril will not be covered by the resulting loss exception if it is otherwise subject to its own separate exclusion. Under Sprague, and now Garden Condominiums, there must be a separate ensuing loss “caused by a new and distinct covered peril” before the resulting loss exception will apply. 

In Garden Condominiums, the court has confirmed that the resulting loss exception will provide insureds with coverage for loss or damage caused by a covered peril such as condensation or collapse, even if those conditions occurred because of faulty workmanship which is otherwise excluded by the policy. In reaching this conclusion, the court expressly rejected Farmers’ argument that the exception should not apply when the covered peril is the natural consequence of an excluded peril. Since the policy is silent about natural consequences, the court refused to read additional language into the policy that would broaden application of an exclusion against an insured.  

Under the current decision, an insurer that wishes to exclude perils that are a natural consequence of faulty workmanship will need to draft its policy to include “sequence of events” causation language without loss exceptions to the exclusions. In the absence of such language, the Washington courts can be expected to broadly interpret the resulting loss exception to afford coverage for loss or damage caused by a covered peril, even when that condition was caused by faulty workmanship otherwise excluded under the policy.