Chip Merlin | Property Insurance Coverage Law Blog | April 4, 2017
A public adjuster called with a common situation—a property loss occurred during repair and the insurance company had initially denied the claim, saying that the loss was from defective construction. The smart public adjuster thought the property damage caused in part by defective construction could lead to coverage under an ensuing loss provision. The policyholder did not want to get bogged down in years of possible litigation with its repair contractor.
I often suggest that adjusters subscribe to FC&S and IRMI publications for their discussions of coverage. Their articles are usually very well written and made by those involved with the historical changes of policy language and the insurance industry’s rational for such changes.
IRMI has an excellent article discussing construction defects and ensuing loss provision. I would suggest readers of this blog take a minute to read Ensuing Loss: Getting Around a Property Policy’s Defective Construction Exclusion. The concept of ensuing loss was explained by example:
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.
Of course, causation issues combined with exceptions to exclusions are usually interpreted far more broadly by policyholders and much more narrowly by many insurers. Jurisdictional decisions and policy language play a huge factor when confronting ensuing loss issues. The article warned of this in its conclusion:
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.
To make certain the public adjuster was not accused of practicing law, I told her to tell the insurer I asked her to send the article to the insurer and that it should reconsider its coverage opinion. Insurance companies acting in good faith should be looking for reasons to find coverage for damage. It will be interesting to see what happens in this instance.