THE “FAULTY PLANNING, CONSTRUCTION OR MAINTENANCE” EXCLUSION IN THE HOMEOWNER’S INSURANCE POLICY BARS COVERAGE FOR ANY LOSS CAUSED BY THE FAULTY ACTS, ERRORS OR OMISSIONS OF THE INSURED OR ANY OTHER PERSON IN PLANNING, CONSTRUCTION OR MAINTENANCE
Are you aware of the “faulty planning, construction or maintenance” exclusion in the homeowner’s insurance policy? This exclusion bars coverage for “any loss caused by the faulty acts, errors or omissions of the insured or any other person in planning, construction or maintenance.” The exclusion defines “construction” as including “materials, workmanship, and parts or equipment used for construction or repair.” Homeowners should make sure they hire competent and skilled contractors to avoid this coverage exclusion.
Most property insurance policies contain some version of a "faulty workmanship" exclusion.
Typical language is as follows:
The Company will not pay for loss or damage caused by or resulting from any of the following:
Faulty, inadequate or defective:
(1) Planning, zoning, development, surveying, siting;
(2) Design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction;
(3) Materials used in repair, construction, renovation or remodeling; or (4) Maintenance;
of part or all of any property on or off an insured premises.
However, in the event an excluded cause of loss that is listed in 3.a. through 3.c. above results in a Covered Cause of Loss, the Company will be liable only for such resulting loss or damage.
The last clause is frequently referred to as "an ensuing loss exception." Under this type of language, while the insurance company need not pay for damages caused solely by the excluded cause of loss, if there is an "ensuing loss," the insurer must pay for that damage. A classic example is if faulty repair resulted in improper wiring and the improper wiring caused a fire. Almost every insurer would pay for the fire damage, but not for the repair of the improper wiring. Of course, as a practical matter, the fire damage would subsume the improper wiring and there would be no question as to what portion of the damage was covered and what portion was excluded.
Water Damage—Ensuing Loss
The issue is far more problematic when separating the excluded loss from the ensuing loss is not as clear-cut. This problem frequently arises in the context of water damage. For example, if faulty construction or repair leads to a leaky roof, many insurers take the position that the resulting water and mold damage is "caused by or resulting from" faulty workmanship, and will not pay for it. Some courts have upheld this rather cramped reading of the exclusion, while others construe it properly and require insurers to pay for the water damage.
Eckstein v. Cincinnati Insurance
An example of the proper reading of the exclusion may be found in Eckstein v. Cincinnati Ins., 469 F. Supp. 2d 455, (W.D. Ky. 2007). In Eckstein, the insureds' house experienced water damage due to a variety of construction related issues. That water damage ultimately resulted in the house becoming contaminated with toxic mold. The home became uninhabitable, and the Ecksteins were forced to live in temporary housing for nearly 2 years. The Ecksteins' expert concluded that the mold damage was caused by massive amounts of water which entered the house and destroyed walls and related structures. Great Northern provided the homeowners coverage (Cincinnati provided builders risk coverage and the same issues arose and were decided in the same way as to Cincinnati in the companion case of Eckstein v. Cincinnati Ins., 469F. Supp. 2d 444 (W.D. Ky. 2007)), and took the position that the water damage and mold damage were losses which resulted from the faulty construction.
The district court noted that many courts have defined ensuing loss as:
a loss that is not directly caused by faulty workmanship or faulty materials, but nonetheless follows as a chance, likely, or necessary consequence of the loss caused by faulty workmanship or materials.
2007 WL 79316 at *8, citing Atlantic Mutual Ins. v. Lotz, 384 F. Supp. 2d 1292, 1305 (E.D. Wis. 2005).
The district court held that the water damage and resulting mold were ensuing losses. The district court differentiated between the cost of repairing the water damage and resulting mold and the cost of repairing the faulty construction. Because the water and mold damage "ensued," and was separate from, the faulty construction, it was a separate and covered loss. The cost of re-doing the faulty construction, i.e., repairing the roof, was excluded.
Bloom v. Western National Mutual Insurance
Another court reached the opposite conclusion when faced with similar facts. In Bloom v. Western Nat'l Mut. Ins., 2006 WL 1806415 (Minn. App.), the insureds discovered the presence of moisture, deterioration, rot, and mold in the wooden sheathing and structural members of their home. The primary cause of the mold and structural damage was water infiltration through the exterior envelope of the house. The cause of the water intrusion was failure of the window installations, absent or inadequate roof flashing, and other construction defects.
The Blooms' homeowners policy had a typical faulty workmanship exclusion. However, the Minnesota appellate court viewed the exclusion much more broadly than did the Kentucky District Court. The Minnesota court looked for a causal connection in the cause of loss between the faulty workmanship and the water damage. The court concluded that the damage caused by mold and rot was not an ensuing loss because it was not a separable and distinct peril. Instead, the mold resulted from water that entered the home through the faulty installation and workmanship of the contractor. Without the faulty installation and workmanship, the water and moisture would not have entered the Blooms' house, and no mold and rot would have resulted. The court also held that the water intrusion and resulting rot and mold were "a single phenomenon," and were, therefore, also excluded under the faulty workmanship exclusion.
The Bloom court went on to find that coverage for the mold and rot was also precluded by another policy exclusion, which precluded coverage for wet or dry rot and mold. Because the ensuing loss, the mold and rot, was otherwise excluded, the court held that it was not covered. While this was not the primary basis for the court's holding, it may well have influenced the result.
Conclusion
The Bloom construction of the exclusion is one frequently adopted by insurance companies, and, in fact, by other courts around the country. However, it is difficult to reconcile the Bloom position, i.e., as long as there is an unbroken chain of causation, there is no coverage, with the concept of ensuing loss. By definition, an "ensuing loss" will always be causally related to the excluded cause. Were it not, the loss would be separate, not "ensuing." It is difficult to logically differentiate an ensuing fire loss from ensuing water damage, but most insurers try. In light of the fact that almost every jurisdiction requires exclusions to be read narrowly and policies construed to afford coverage, the Eckstein approach is more consistent with the rules of construction and is logically consistent with the purpose of an "ensuing loss" provision.
When faced with this issue, risk manager and policyholder counsel should be sure to highlight the logical inconsistency in the broad reading of the exclusion and the narrow reading of the "ensuing loss" exception. In addition, the cost of repairing the faulty workmanship itself is most likely excluded under most versions of this exclusion (although there are forms which might allow such recovery) and resolution of claims will be easier if policyholders do not attempt to recover that cost as part of the claim. Of course, because different jurisdictions approach this in different ways, usually in one of the two outlined above, one must always be mindful of applicable law.
New Jersey Insurers May Not Be On The Hook For Faulty Workmanship
New Jersey insureds seeking coverage for negligent repair efforts after SuperStorm Sandy could be out of luck. The Superior Court of New Jersey, Appellate Division, recently found in Margalit v. Woods Restoration Services, LLC and Chubb Insurance Company of New Jersey,1 an exclusion in the insurance policy for “faulty planning, construction or maintenance” was applicable to exclude coverage for negligent construction.
In Margalit, the plaintiffs discovered a leak in the radiant heat system, which included piping laid within the concrete slab. The homeowners made a claim to their insurer, Chubb. The policy required Chubb to pay the reasonable cost of removing and replacing the concrete slab to allow access to the plumbing, and the repairs and replacement necessary to restore the house to the condition it was in prior to the leak.
The Margalits hired a general contractor to perform the work and Chubb made payments of approximately $190,000 pursuant to the contractor’s estimates. However, because of the general contractor’s negligent and faulty work, the plaintiffs were left with $149,000 of unfinished work and approximately $350,000 to repair the work negligently completed.
In the complaint against Chubb, the Margalits alleged that “[t]he scope of work approved by Chubb to replace the radiant heat system and repair the damage was insufficient to accomplish the replacement of the radiant heat system and repair of the damage.”
In response, Chubb argued that the “faulty planning, construction or maintenance” exclusion applied. This exclusion bars coverage for “any loss caused by the faulty acts, errors or omissions of [the insured] or any other person in planning, construction or maintenance.” The exclusion defines “construction” as including “materials, workmanship, and parts or equipment used for construction or repair.”
The Margalits presented evidence that the general contractor was negligent, and argued that as a result, the amounts paid by Chubb were insufficient. Ultimately, the Court found that the faulty workmanship exclusion applied:
Our concern is with the application of the faulty workmanship exclusion. This exclusion bars coverage for ‘any loss caused by the faulty acts, errors or omissions of…any…person in…construction[,]’ the definition of which specifically includes ‘workmanship.’
* * *
The only evidence of causation for these claims was the negligence or poor workmanship of [the general contractor] and its subcontractors…Both the claims and the supporting evidence thus fell squarely within the faulty workmanship exclusion.
* * *
Therefore, even giving plaintiffs the benefit of all favorable inferences, the claim presented to the jury was barred by the faulty workmanship exclusion and the evidence was insufficient to support a verdict against Chubb.
This faulty workmanship exclusion could have an impact on New Jersey homeowners seeking coverage from their insurers for negligent repairs and reconstruction after SuperStorm Sandy. Homeowners should make sure they hire competent and skilled contractors to avoid this coverage dilemma.
1 Margalit v. Woods Restoration Services, LLC, 2013 WL 3744068 (Sup. Ct. N.J. July 18, 2013).
Despite the significant burden insurers bear to prove exclusions to coverage, a recent decision from the United States District Court in Minnesota illustrates the power a well-drafted exclusion can have.
In Friedberg v. Chubb & Son Inc., No. 08-6476, (D. Minn. Oct. 25, 2011), the insured homeowners sought insurance coverage for extensive damage to their home’s exterior framing and insulation.
Water penetrating through defects in the house’s exterior cladding system had caused most of the damage. The homeowners claimed that Chubb Indemnity Insurance Company had responsibility to cover the loss under the policy it issued covering the house.
But that policy excluded “any loss caused by [faulty] ... planning, construction or maintenance,” but covered “ensuing loss” unless otherwise excluded.
Chubb moved for summary judgment, arguing that the claimed loss fit squarely within the plain language of this exclusion. The district court agreed and found no coverage was owed.
This case, one of first impression in Minnesota, follows the vast majority of cases across the country that hold that an “ensuing loss” must be a loss separate and distinct from the original excluded peril.
The court’s opinion is also noteworthy for its discussion of concurrent causation.
What Lies Beneath
Plaintiff homeowners Joseph and Carolyn Friedberg built their home using an exterior insulation and finishing system (EIFS), also known as synthetic stucco.
According to both parties’ experts, this system was defective because it allowed moisture to penetrate the exterior surface without providing a way for the moisture to escape once it got in. Moisture trapped beneath exterior cladding causes mold, rot and deterioration of the structural elements of a house.
The manufacturer of the EIFS system entered into a class action settlement in which these homeowners participated. But in the time following that 2002 settlement, these homeowners chose not to do any repairs. Instead, they claimed that they first became aware of the damage to their home following an attempt to repair a small hole in the side of their house in late 2006.
During that repair, the extensive damage to the house’s exterior structure was discovered. The homeowners then made a claim to Chubb under their homeowners’ policy.
Chubb’s expert’s inspection revealed multiple cracks in the cladding, and water damage and rot in the home’s architectural beams, roof deck, sheathing and framing members. Chubb’s expert concluded that the damage had occurred over time due to defects in the cladding as well as a defective roof.
Chubb denied coverage of the homeowners’ claim. Chubb based its denial on exclusions within the policy, including the faulty planning, construction or maintenance exclusion, which the court called the “construction defects exclusion” in its opinion. That exclusion provided:
"Faulty planning, construction or maintenance. We do not cover any loss caused by the faulty acts, errors or omissions of you or any other person in planning, construction or maintenance. It does not matter whether the faulty acts, errors or omissions take place on or off the insured property. But we do insure ensuing covered loss unless another exclusion applies. ... 'Construction' includes materials, workmanship, and parts or other equipment used for construction or repair."
The policy defined “caused by” as: “The words ‘caused by’ mean any loss that is contributed to, made worse by, or in any way results from that peril.”
The homeowners originally brought suit in a Minnesota state court, but Chubb removed to federal district court. Following discovery, both sides moved for summary judgment. On Oct. 25, 2011, Judge David Doty of the United States District Court for the District of Minnesota entered his decision granting summary judgment in Chubb’s favor.
Just One Excluded Loss
At summary judgment, both sides agreed that the basic facts were undisputed and made multiple arguments for judgment as a matter of law. But for the court, the plain language of the Chubb exclusion covering construction defects controlled the case’s outcome.
To begin its analysis, the court employed traditional rules regarding insurance policy interpretation.
Determining that the homeowners had satisfied their prima facie burden of establishing coverage by proving physical damage to covered property, the burden then shifted to Chubb to prove that its faulty construction exclusion applied.
While strictly construing that exclusion against Chubb as the insurer, the court nonetheless gave unambiguous language within the policy its plain and ordinary meaning.
Under this standard, the court found that the plain language of Chubb’s faulty construction exclusion worked to prevent coverage of the homeowners’ claim. To reach that conclusion, the court considered — and rejected — several arguments the homeowners made regarding how the operative exclusion should be construed.
First, the homeowners argued that term “loss” within the exclusion only means monetary loss and does not bar coverage for damage or physical loss.
Under this reading, the homeowners claimed the relevant exclusion barred coverage for expenses incurred to correct the faulty cladding, but not the amounts paid to correct ensuing water damage. The court disagreed and found instead that by using the term “any loss,” the plain language of the exclusion unambiguously includes both the faulty construction itself and any harm that resulted from that construction.
To reach that decision, the court distinguished the decision in Buscher v. Economy Premier Assurance Co., No. 05-544, (D. Minn. Feb. 1, 2006).
In Buscher, the wording of the exclusion was limited to "loss to property ... caused by construction defects.” The court found that use of the term “any loss” in the Chubb exclusion expanded its application.
And, unlike the Buscher exclusion, the exclusion here covered ensuing losses. Adopting the interpretation the homeowners proposed would make surplusage of that language, enforcing the court’s conclusion that the suggested interpretation was improper.
The court also rejected the homeowners’ argument regarding concurrent causation. They argued that because Minnesota — the state of governing law — is a concurrent causation jurisdiction, if water damage was the overriding cause of the damage, the damage should be covered even if faulty construction also caused the harm.
But the court said that, in Minnesota, water infiltration is certain when not prevented by proper construction and that no jury could conclude that any other overriding cause but the construction defects caused the harm.
Using similar reasoning, the court also determined that the water damage did not qualify as an ensuing covered loss. Relying on Bloom v. Western National Mutual Insurance Co., No. A05-2093, (Minn. Ct. App. July 3, 2006), review denied, No. A05-2093 (Minn. Sept. 19, 2006), the court determined that the deterioration, rot and mold that resulted from the water intrusion were not the “separate and distinct” perils needed to qualify as a covered ensuing loss.
Instead, the court concluded that the damage was the result of a single phenomenon — the faulty construction — without any other intervening cause but time.
Conclusion
For insurers, the evidentiary and factual burdens required for summary judgment often make it difficult to obtain complete resolution of a case at the end of discovery.
In the right case, however, insurers can persuade courts that the unambiguous language of the policy limits liability as a matter of law. To find the success that Chubb found here, insurers will need both a well-written exclusion and a discovery record that confirms that the disputed claim fits squarely within the language of that exclusion.