Washington Supreme Court's Unanimous Decision in Favor of Contractor's Builders Risk Insurance

On May 17, 2012, in Vision One, LLC v. Philadelphia Indem. Ins. Co., the Washington Supreme Court issued a big win for contractors across the state. Ahlers & Cressman’s John Ahlers and Ashbaugh Beal’s John Riper argued to the Supreme Court on behalf of the AGC, NECA, and NUCA and other contractor organizations in support of the contractor in this case, Vision One.

Vision One was the general contractor on a condominium project in Downtown Tacoma. Shortly after placing concrete for one of the floor slabs, the shoring underneath gave way, and the formwork, rebar, and wet concrete collapsed on to the lower level structure. The concrete cured, resulting in a big mess that took several weeks to clean up.

Vision One had an “all-risk” builders risk insurance policy on the project and submitted a claim to its insurance company, Philadelphia Indemnity Insurance Co. (“Philadelphia”). Philadelphia investigated the collapse and concluded that it resulted from a combination of deficient design and faulty workmanship, which were specifically excluded losses under the policy. Philadelphia thus denied coverage, stating in its denial letter that “the damage to the construction project was a sole and direct result of the marginal shoring design and faulty installation of the shoring.”

Vision One’s policy, however, contained an “ensuing loss” clause for losses associated with faulty workmanship. An ensuing loss clause “operates to carve out an exception to the policy exclusion” and “limits the scope of what is otherwise excluded under the policy.” Hence, if a event occurs not covered by insurance, such as faulty workmanship, any consequential damage (“ensuing loss”) that is covered remains covered. Under Vision One’s policy, “collapse” was a covered event. Thus, even though the initial cause of the collapse was deficient design and faulty workmanship, the court held that the collapse (“ensuing loss”), was nevertheless covered.

Philadelphia made three primary arguments, which were all rejected by the court:

  • First, Philadelphia argued that if the jury decided that the cause of the collapse was only due to deficient design, not faulty workmanship, then the ensuing loss clause would not apply because the ensuing loss clause only applied to the faulty workmanship exclusion, not deficient design. The judge rejected this argument because, based on Philadelphia’s own expert testimony, the collapsed was caused by a combination of deficient design and faulty workmanship. The court found that there was no way that the jury could determine that only deficient design caused the collapse based on the evidence presented.
  • Next, Philadelphia argued that the “efficient proximate cause” rule should apply. The efficient proximate cause rule applies when two or more perils (such as, deficient design and faulty workmanship) “combine in sequence to cause a loss and a covered peril is the predominant or efficient cause of the loss.” Philadelphia argued that if the jury determined that the predominant (or efficient) cause of the loss was deficient design, then coverage would be excluded. The court, however, held that the efficient proximate cause rule only applies to establish coverage, not to exclude coverage. Thus, since Philadelphia was only invoking the rule to deny coverage, the rule did not apply.
  • Finally, Philadelphia argued that the policy also excluded “sequence of events initiated by an excluded event,” therefore, the collapse (a covered event), which was initiated by the deficient design and faulty workmanship (non-covered events), was excluded under the “sequence of event” exclusion. Philadelphia, however, did not make this argument until litigation had already begun. Importantly, in its denial letter, Philadelphia only denied coverage because the deficient design and faulty workmanship was the sole and direct result of the damage. The Supreme Court, again agreeing with the trial judge, held that because Philadelphia did not invoke the “sequence of events” clause – only the sole and direct result clause – when it denied Vision One’s claim, Philadelphia was precluded from making that argument.

This case has big (positive) implications for contractors: (1) an insurance company cannot invoke the “efficient proximate cause” rule to deny coverage, the rule can only be invoked to allow coverage; and (2) an insurance company is precluded from arguing any basis for denial of coverage that it fails to invoke in its denial letter.

Thank you to the AGC, NECA, and NUCA and John Riper and his firm for their continued support of Washington contractors.

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