Construction Case Law Updates

Construction

The Washington Supreme Court as well as the Washington Court of Appeals have clarified two important aspects of construction insurance policies.

First, who bears the burden of proving coverage in a builders all-risk policy?

Second, what is the effect of a resulting loss clause within a policy?

  1.     Seattle Tunnel Partners v. Great Lakes Reinsurance (UK) PLC, 200 Wn. 2d 315 (2022)

A builder’s all-risk policy became the center of a dispute after the Washington Department of Transportation (WSDOT) and Seattle Tunnel Partners (STP) contracted to replace the existing Alaskan Viaduct in Seattle with a tunnel.

In compliance with the project contract, STP obtained an all-risk builders policy naming both WSDOT and STP as the insureds.  For this particular project, a tunnel boring machine was acquired to perform the necessary tunnel work.  Under the all-risk policy, damage to the tunnel and boring machine were covered.  During the project, the boring machine ceased working commencing a two-year repair period which caused significant delays in the project.

Subsequently, a claim was filed with the insurer, Great Lakes.  However, Great Lakes denied coverage due to various exclusions such as a “Machinery Breakdown Exclusion”, losses for project delays, etc.  After litigation ensued, the Court sided with Great Lakes’ policy interpretation holding a design defect resulting in the boring machine’s failure was not in fact covered.  In determining coverage did not exist, the Court clarified the burden upon both the insured and the insurance company.

The holder of an all-risk policy, here WSDOT and STP, has the initial burden to show the coverage event was not within a specific exclusion of the policy. Only then, when the insured meets its initial burden, does the burden shift to the insurer to prove the event was unequivocally covered by an exclusion. Here, Great Lakes succeeded in proving their exclusion language applied to the tunnel boring machine because.

  1. The Gardens Condominium v. Farmers Insurance Exchange, 24 Wn. App. 2d 950 (Div. 1, December 19, 2022)

Here, the appellate court held a resulting loss provision in an exclusion for faulty design and construction resulted in coverage for the insured.

In 2004, the Gardens Condo building in Shoreline, Washington had roof repairs done to correct ventilation issues.  In 2019, the Gardens discovered the repairs were defective and had resulted in moisture damage to the sheathing, fireboard, joists, and sleepers.  The Gardens held an all-risk policy from Farmers and sought coverage for the damage.  Upon investigation, Farmers concluded the damage was from faulty roof repair work and denied coverage as their policy contained a faulty repair exclusion.  The trial Court held in favor of Farmers.

However, the Court of Appeals stated, “the trial court misinterpreted the resulting loss clause in Farmers’ policy” and reversed the Trial Court.  The Appellate Court found that because the faulty repair exclusion contained an ensuing loss provision, coverage existed.  Resulting loss clauses narrow exclusion language.  Accordingly, while the Farmers’ policy excluded coverage for faulty repairs the resulting loss clause preserved coverage for damage caused by a covered cause of loss.  In other words, because the policy covered damage caused by condensation and humidity, coverage existed despite the faulty repair exclusion.  

NOTICE: This Legislative & Case Law Alert does not, and is not intended to, constitute legal advice; the information is not intended to be exhaustive; instead, all information, content, and materials contained herein are for general informational purposes only. 

Moreover, the content herein does not, and is not intended to, create an attorney-client relationship.

The content in this Legislative & Case Law Alert is provided “as is”. 

Should you have any questions or concerns regarding the content please contact any of the attorneys at Dunn & Black, P.S.

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