The Illinois Appellate Court, First District, recently held an ensuing loss exception to a faulty workmanship exclusion provided coverage for resulting business personal property damage.
In so ruling, the Appellate Court confirmed that an ensuing loss, which is not itself an excluded peril or loss, is covered pursuant to an ensuing loss exception to a faulty workmanship exclusion.
A copy of the opinion is available at: http://www.illinoiscourts.gov/Opinions/AppellateCourt/2015/1stDistrict/1140501.pdf
An insured business owner sued its insurer for breach of contract pursuant to a policy covering a premises and business personal property, and sued the insured’s landlord and a roofer in tort.
The insured alleged that its landlord and a roofer removed the roof over the insured premises without protecting and causing damage to the insured’s goods stored in the premises.
The insurer moved to dismiss the breach of contract allegations by citing the policy’s exclusion for faulty, inadequate or defective workmanship.
The trial court initially held that the exclusion applied to the alleged damage.
On reconsideration the trial court vacated its order, certified the question of coverage to the Appellate Court, and explained that the initial order failed to consider the “resulting loss” exception to the exclusion, which “clearly gives coverage to the loss that resulted from the excluded coverage of the roof.”
On appeal, the Appellate Court held that faulty workmanship initially excluded coverage, but the ensuing loss exception provided coverage for the insured’s goods resulting from dirt and debris entering the premises as a result of the roofer’s faulty workmanship.
As you may recall, if the words in an insurance policy are unambiguous, a court must afford them their plain, ordinary, and popular meaning. However, if the words are susceptible to more than one reasonable interpretation, then they are ambiguous and will be construed in favor of the insured and against the insurer who drafted the policy.
In addition, the Appellate Court recognized that the dispositive question in analyzing an ensuing loss exception to an exclusion is whether the loss that ensues from the excluded event is covered or excluded. If the ensuing loss is also an excluded peril or an excluded loss, there is no coverage. However, if the policy covers the peril or loss that results from the excluded event, then the ensuing loss clause provides coverage.
The insurer argued the damage to the insured’s goods were so closely connected to the excluded faulty workmanship that there was no separable covered cause of loss or resulting loss.
The Appellate Court disagreed and found there were at least two plausible ways in which a covered cause of loss or resulting loss implicate the ensuing loss exception pursuant to the policy’s broad definition of “Covered Cause of Loss” for any risk of direct physical loss not explicitly excluded.
First, the excluded faulty workmanship caused physical damage to the insured’s goods, and other jurisdictions have recognized coverage for ensuing loss to property other than that which is the subject of the faulty workmanship.
Second, the dirt and debris allowed to enter the insured premises due to the roofer’s faulty workmanship and resulting in damage to the insured’s goods may reasonably be viewed as separate, non-excluded causes of loss.
In addition, the Appellate Court acknowledged that even if the insurer’s position was reasonable, the interpretations in favor of coverage were also reasonable and created an ambiguity in favor of coverage.
Accordingly, the Appellate Court affirmed the trial court’s order reinstating the insurer as a named defendant.