Insurance Coverage Update
In TMW Enterprises, Inc. v. Federal Insurance Company, the United States Court of Appeals for the Sixth Circuit held that a “construction defects” exclusion in an “all risk” insurance policy barred coverage for water damage caused by faulty construction, even though the policy covered water damage and the exclusion did not apply to “ensuing losses.”
The insured in TMW Enterprises, Inc. argued that water infiltration, and not faulty construction, was the true culprit for approximately $3.9 Million in damages to a recently constructed condominium and retail complex. Thus, according to the insured, water damage was an “ensuing loss” of defective construction and, therefore, coverage was in order.
The insurer, however, convinced the Court that, since water damage naturally flows from faulty construction, to allow coverage for water damage proximately caused by faulty construction, would illogically “undo the exclusion [for construction defects].” The Court consoled the insured, noting that there is a purpose for “ensuing loss” provisions: “[t]he clause means simply that what is not excluded is covered.” “[T]he caveat at the end reminds us that if an exclusion does not apply, then coverage exists.” In other words, “[a]n ensuing loss clause does not cover loss caused by the excluded peril, but rather covers loss caused to other property wholly separate from the defective property, such as a fire started by water leaking into an electric socket when such water is from faulty construction work.”