The Washington Supreme Court’s March 14, 2024 decision in Gardens Condominium v. Farmers Insurance Exchange1 held that an all-risk policy’s resulting loss clause preserves coverage for non-excluded losses that are the natural consequences of an excluded peril. The Court underscored that its holdings in two prior resulting loss decisions, Vision One2 and Sprague3, do not require an “independent” or intervening cause of loss for coverage to exist, holding that interpreting the policy language otherwise would “negate the effect of the resulting loss clause.”
Gardens Condominium obtained an “all-risk” property policy from Farmers Insurance Exchange. The policy covered damage caused by a “Covered Cause of Loss,” defined as any risk of direct physical loss not otherwise excluded. The policy stated that damage is caused by an excluded event when the event (1) “directly or solely results in loss or damage,” or (2) “initiates a sequence of events that results in loss or damage, regardless of any intermediate or final event in that sequence.” The Court interpreted the second item to “suggest that if an exclusion kicks off a chain of events causing loss or damage, the policy does not provide coverage for any losses in that chain.”
The policy excluded coverage for damage caused by, among other things, faulty, inadequate, or defective design, specifications, workmanship, repair, construction or renovations, which the Court called a “faulty workmanship” exclusion. This exclusion contained a resulting loss clause, that stated, “[I]f loss or damage [caused] by a Covered Cause of Loss results, we will pay for that resulting loss or damage.”
Gardens discovered damage to the condominium’s roof fireboard, sheathing, sleepers, and joists. Gardens determined that defective design or repair to the roof’s ventilation system had allowed water vapor and moisture to become trapped, causing damage to the fireboard and other roof components. Gardens sought coverage for the damage to the roof components caused by the excessive moisture, a non-excluded cause of loss, and did not seek coverage to repair the defectively constructed roof components. Farmers denied Garden’s claim for coverage, concluding that no coverage existed for Garden’s water-damaged roof components because an excluded cause of loss—defective construction—had “initiated a sequence of events resulting in the loss or damage.”
Gardens filed suit seeking a declaration that the policy’s resulting loss clause provided coverage for the non-defective roof components. The trial court entered summary judgment for Farmers, finding that the resulting loss clause did not apply when an excluded cause of loss began a series of events that resulted in property damage unless “there’s some sort of unexpected [sic] or some kind of causal break.” The Court of Appeals reversed, interpreting Farmers’ resulting loss clause to preserve coverage for damage that results from faulty workmanship, as long as this resulting damage is caused by a non-excluded cause of loss. Farmers sought review.
The Washington Supreme Court affirmed the Court of Appeals, relying on its prior decisions and settled rules of policy interpretation, including that courts must enforce clear and unambiguous policy language as written, and that exclusions are strictly construed against the insurer because “‘[e]xclusions from insurance coverage are contrary to the fundamental protective purpose of insurance.” The Court held that “resulting loss exceptions preserve coverage for covered losses when an exclusion would have otherwise removed it,” and that this preservation of coverage “serves as a reminder that exclusions in an insurance policy should not swallow the basic coverage provided by the policy.”
The Court rejected Farmers’ reliance on Sprague, which it clarified did not stand for the proposition that a resulting loss is not covered when it is a natural consequence of an excluded loss; rather, no coverage existed in Sprague because the damage resulted solely from excluded causes of loss. In Gardens, consistent with its decision in Vision One, the Court held that the resulting loss clause preserved coverage for Garden’s water damaged roof components because water was not an excluded cause of loss, even though faulty roof design or construction began the chain of events ultimately leading to the damage.
Gardens affirms that Washington courts interpret resulting loss exceptions to preserve coverage notwithstanding other policy language that attempts to require an intervening or “independent” covered cause of loss. Policyholders should carefully review policy language, including any resulting loss provisions, and may wish to consult with coverage counsel if an insurer refuses to cover losses for what appears to be covered property damage.
Editor's Note: Javier Torres, a 2024 Miller Nash summer associate, contributed to this blog post.
1 Gardens Condo. v. Farmers Ins. Exch., 544 P.3d 499 (Wash. 2024).
2 Vision One, LLC v. Philadelphia Indem. Ins. Co., 174 Wn. 2d 501 (Wash. 2012).
3 Sprague v. Safeco Ins. of America, 174 Wn. 2d 524 (Wash. 2012).
[View source.]
