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(Article from Insurance Law Alert, June 2015)

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An ensuing loss provision provides coverage for a loss that occurs when an event that is excluded from coverage causes a subsequent and distinct event that is covered.  When seeking coverage pursuant to an ensuing loss provision, policyholders frequently argue that an intervening (and non-excluded) event contributed to a loss that originated from an excluded event.  In a recent decision, a Missouri federal district court rejected this argument and ruled that that construction-related property damage was caused entirely by an excluded event.  Performing Arts Community Improvement District v. Ace American Ins. Co., 2015 WL 3491292 (W.D. Mo. June 3, 2015).

The coverage dispute arose out of losses related to defects in the design and construction of a parking garage.  The original design plan called for a maximum of 18 inches of fluid fill against a retaining wall, but the contractor subsequently increased the amount to 36 inches.  During construction, the wall cracked.  A structural engineer determined that the failure of the wall was caused by the increase in fill amount.  On this basis, the contractor’s insurer denied coverage, citing a design defect exclusion.  Plaintiff filed suit, alleging breach of contract.  Plaintiff argued that the ensuing loss provision restored coverage because excessive pressure caused by the additional fill was an ensuing event that caused the loss.  The court disagreed and granted the insurer’s summary judgment motion.

The court rejected plaintiff’s attempt to “divorce the defective design from the losses it caused.”  The court explained that an ensuing loss must be “distinct and subsequent” to the excluded loss, which was not the case here.  The court stated: “[t]his case presents no subsequent event.  A defective wall was created (because it was built in accordance with defective plans), and the defective wall failed.  There was no ensuing event that caused the wall to fail.  Plaintiff[ ] submits [that] the build-up of lateral pressures was an ensuing event, but this is simply another way of saying the wall was defectively designed.”  As the court noted, numerous other jurisdictions have rejected policyholder efforts to separate losses from excluded causes in order to obtain coverage under ensuing loss provisions.