“Ensuing loss” provisions have long been the subject of nuanced arguments in insurance litigation. The provisions, which sometimes afford coverage for a “covered loss” stemming from an expressly excluded peril, serve as fodder for policyholders to attempt to argue a policy is ambiguous, often where the losses are clearly excluded. Ensuing loss provision disputes can be fact-intensive and should be evaluated carefully. While this area of the law is generally well-developed in state and federal courts, some jurisdictions have yet to define their position on the applicability of certain ensuing loss provisions. In Bob Robison Commercial Flooring Inc. v. RLI Insurance Co., the Eighth Circuit Court of Appeals considered one of those jurisdictions — Arkansas.
In Bob Robison, Nabholz Construction hired Bob Robison Commercial Flooring Inc. (BRCF) to install a vinyl gym floor with painted basketball and volleyball lines at an Arkansas middle school. BRCF installed the floor and subcontracted with Robert Liles Parking Lot Services to paint the floor. Liles completed the paintjob, but its work was faulty, leaving crooked lines, incorrect markings, and smudges. Because the paint could not simply be removed to correct Liles’ faulty work, BRCF spent $181,415.39 to replace the flooring and repaint the lines.
BRCF filed a claim for the project loss with RLI Insurance Co. under BRCF’s builder’s risk policy. RLI investigated the loss and denied the claim because the policy “excludes coverage for loss or damage caused by errors in covered property due to workmanship.” The exclusion and ensuing loss provision stated:
PERILS EXCLUDED
2. “We” do not pay for loss or damage that is caused by or results from one or more of the following:
* * * * *
d. “Defects, Errors, Or Omissions In Property” – “We” do not pay for loss or damage caused by or resulting from inherent defects, errors, or omissions in covered property (whether negligent or not) relating to:
1) design or specifications;
2) workmanship or construction; or
3) repair, renovation, or remodeling.
But if a defect, error or omission as described above results in a covered peril, “we” do cover the loss or damage caused by that covered peril.
BRCF sued RLI in state court and conceded the faulty workmanship (the paintjob) was excluded but alleged that the ensuing loss provision “does cover the irreparable damage caused to the vinyl gym floor as a result of the subcontractor’s negligence.” RLI removed the case to the Eastern District of Kansas and moved for summary judgment. The district court granted summary judgment in favor of RLI, ruling that the policy unambiguously excluded coverage for Liles’ defective workmanship, which was the sole cause of the damage.
On appeal, BRCF argued that the district court erred because the ensuing loss provision “provides coverage for the replacement cost of the vinyl gym floor.” BRCF argued that the “definition of covered peril conflicts with the ensuing loss clause” creating an ambiguity that should have been resolved in its favor. The court rejected that argument, finding that the policy provisions are not conflicting, and the ensuing loss provision “restores coverage if an excluded peril results in a loss caused by a covered peril.” The court explained:
[The ensuing loss provision] applies to a second loss caused by a covered peril that the excluded peril may have set in motion, like the San Francisco fires that resulted from the 1906 earthquake.
The court also rejected BRCF’s argument that the ensuing loss provision triggered covered for the replacement of the gym floor. Finding no Arkansas precedent on point, the court turned to the Fifth Circuit’s decision in Balfour Beatty, in which the court held that when there is only one cause for the loss, an ensuing loss provision will not open coverage:
[An ensuing loss provision] is only triggered when one (excluded) peril results in a distinct (covered) peril, meaning there must be two separate events for the Exception to trigger.
Under the Balfour rationale, the Eighth Circuit held that “if Liles’s faulty workmanship was the sole cause of damage to the gym floor, the faulty painting did not result in a covered peril; the painting ‘was itself the peril.’” In other words, because there was no other damage or peril to the gym floor apart from Liles’ faulty workmanship (the excluded peril), the ensuing loss provision could not restore coverage for the botched paintjob. Accordingly, the Eight Circuit affirmed the summary judgment ruling.
