The recent Washington State Appeals Court decision Vision One LLC v. RSUI, — P.3d — (October 19, 2010, Division II) is a reminder that not all coverage issues can be resolved by a judge as a matter of law. Vision One was a general contractor developing a condominium complex in Tacoma, Wash. Vision One hired two concrete subcontractors. One of the subcontractors was hired to pour concrete slabs while the other subcontractor was hired to put up shoring equipment to temporarily support the concrete slab after it was poured. However, the shoring structure collapsed and destroyed a freshly poured concrete slab.
Vision One thereafter tendered a first-party property claim to its insurer, Philadelphia Indemnity Insurance Company. Philadelphia hired a structural engineer to investigate the cause of the collapse and concluded that the marginal design of the shoring equipment combined with faulty installation of the shoring equipment likely caused the collapse. Philadelphia thereafter denied coverage to Vision One based on a faulty and defective workmanship exclusion, which provided in pertinent part:
We will not pay for "loss" caused by or resulting from ... faulty, inadequate, or defective materials, or workmanship ... But if loss by any of the Covered Causes of Loss results, we will pay for that resulting loss.
Philadelphia's reason for denying coverage was that the sole and direct cause of the loss was the marginal shoring design and faulty installation, and that there was no independent covered peril that resulted in the claimed damage.
Vision One disagreed that the sole cause of loss was faulty or defective workmanship and sued Philadelphia. On the eve of trial, and during pre-trial motions, the court ruled that the Philadelphia policy covered the concrete collapse as a matter of law. The court reasoned that the concrete slab and the shoring equipment were separate and distinct. Thus, the loss to the concrete slab, which was not defective, was covered. The case then went to the jury on the issues of bad faith and violations of Washington's Consumer Protection Act. The jury found for Vision One, and Philadelphia appealed.
The appeals court reversed the trial court's ruling that the concrete collapse was covered as a matter of law. Importantly, the appeals court found that the exclusion required a jury, not a judge, to determine what the "cause" of the collapse was. The appeals court explained that, under Washington law, any time an exclusion uses the term "cause," it refers to efficient proximate cause. Under Washington law, whenever covered and excluded perils combine to cause a loss, the loss is covered only if the predominant or efficient proximate cause was a covered peril. The appeals court reversed the trial court and determined that the case would need a jury to determine whether the efficient proximate cause of the collapse was faulty or defective workmanship, in which case the loss would be excluded.
The appeals court also explained when the resulting loss exception to the exclusion would not apply. The court explained:
The provision applies when an excluded peril causes a separate and independent peril ... Damage resulting from the covered peril is then covered under the resulting loss provision, while damage resulting from the initial excluded peril remains uncovered. ... For example, following the destruction caused by the 1906 San Francisco earthquake, gasfed fires broke out and caused even more damage across the city. Most property insurance policies excluded earthquake damage but covered fire damage. Because an excluded peril (earthquake) caused an independent peril (fire), the resulting fire damage was covered as a "resulting loss." But earthquake damage remained uncovered.
The appeals court held that, if faulty workmanship caused the shoring and concrete slab to collapse, the resulting loss exception would not apply because faulty workmanship was the initial excluded peril and the collapse was the loss. There would be no independent covered peril, such as fire, that caused a covered resulting loss.
The appeals court also addressed an ancillary issue about whether Vision One had breached the insurance policy by settling with one of its subcontractors. Shortly before the trial, Vision One settled with and released the shoring equipment subcontractor for claims relating to the concrete collapse. Philadelphia, in turn, claimed that Vision One had impaired its recovery rights against the subcontractor by agreeing to a settlement and release of the subcontractor. Philadelphia claimed that this was a breach of the insurance policy that should prevent Vision One from securing coverage. The trial court disagreed with Philadelphia and so did the appeals court. The appeals court held that when an insurer denies coverage and the insured thereafter settles with a tortfeasor —e.g. the subcontractor who actually caused the loss—the insurer is estopped from claiming that the insured breached the policy by impairing the insurer's recovery rights.
The primary import of the Vision One case is that juries will be asked to determine cause as used in policy exclusions if there is a reasonable dispute over what actually caused something to occur. Thus, an insurer considering whether to deny a claim based on an exclusion that uses the term "cause," should carefully consider whether other potentially covered causes may have contributed to the loss. If there are other potentially covered causes that contributed to a loss, then the issue of predominant cause may need to be presented to a jury. Another lesson to take away from the Vision One case is that an insurer who denies a claim does so at the risk that they might lose their subrogation recovery rights if the insured decides to enter into a settlement thereafter. This is another reason that insurers should tread carefully before denying a claim.
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