A while back (well, not too long ago, but it was May 17th, which seems like eons ago in internet news cycle time) the Supreme Court issued a useful opinion on the meaning and interpretation of “resulting loss” or “ensuing loss” clauses in all-risk insurance policies and the application of the “efficient proximate cause rule.” The case was Vision One, LLC v. Philadelphia Indemnity Insurance Company (Wash., May 17, 2012) (en banc).
The Court started by distinguishing between all-risk policies and specific-peril policies of property insurance. Under an all-risk policy, the insurance covers a peril unless it is specifically excluded. Under a specific-peril policy, the insurance does not cover a peril unless it is specifically listed. “In both types of property insurance, coverage is commonly triggered — or excluded — when a specified peril ’causes’ a loss.”
In an all-risk policy, a “resulting loss” clause limits the effect of listed exclusions. “While coverage may be excluded when a certain peril causes a loss, a resulting or ensuing loss clause operates to carve out an exception to the policy exclusion. So if a policy excludes losses “caused directly or indirectly” by peril X, an ensuing loss clause would “narrow the blanket exclusion by providing that ‘any ensuing loss not excluded is covered.'” You can see where this could get confusing. A loss that is “indirectly” caused by X is excluded, but a “resulting” loss is covered if not otherwise excluded. What’s the difference between “indirectly caused” and “resulting”?
Well, the Supreme Court provided an example:
Suppose a contractor miswires a home’s electrical system, resulting in a fire and significant damage to the home. And suppose the homeowner’s policy excludes losses caused by faulty workmanship, but the exclusion contains an ensuing loss clause. In this situation, the ensuing loss clause would preserve coverage for damages caused by the fire. But it would not cover losses caused by the miswiring that the policy otherwise excludes. Nor would the ensuing loss clause provide coverage for the cost of correcting the faulty wiring.
In drawing the line between “indirectly caused” and “resulting,” the Supreme Court instructed that “it is important to read the ensuing loss clause in the context of the coverage that was contemplated by the parties.” To illustrate this purposivist approach, the Supreme Court provided a colorful example from the Sixth Circuit Court of Appeals:
As an “all-risk” policy, this insurance policy basically covers everything unless specifically excluded. That means the number of possibilities for last-in-time “but for” causes of damage are limited only by the imagination of the reader. . . . What if faulty construction allows humid summer air to enter the building, which rusts metal fixtures? But for the exposure to the summer air, no damage to the fixtures would have occurred. Yet the contract does not exclude damages caused by “air.” Coverage? What if a poorly constructed ceiling beam falls, smashing the floor below? But for the force of gravity, no damage to the floor would have occurred. Yet the contract does not exclude damages caused by “gravity.” Coverage?
The issue in this case is that Vision One’s policy excluded losses caused by “faulty workmanship.” And the insured construction project suffered a collapse of concrete shoring and a concrete slab that, in some way, was related to faulty workmanship by the shoring company. So was the collapse an otherwise covered ensuing loss, or was the collapse caused by the faulty workmanship and therefore excluded?
Well, the Supreme Court concluded that the collapse was a covered ensuing loss under the Vision One policy. Why? “The all-risk policy did not exclude the peril of collapse. Moreover, it affirmatively appears the parties intended coverage for collapse.” Therefore, when a covered collapse results from an otherwise excluded act of faulty workmanship, the collapse losses are covered.
What does this have to do with the “efficient proximate cause” rule? Philadelphia argued that the jury should have to determine whether faulty workmanship or defective design was the efficient proximate cause of the loss because while the “faulty workmanship” exclusion had an ensuing loss clause (which resulted in coverage under the Court’s reasoning), the “defective design” exclusion had no ensuing loss clause.
But the Supreme Court rejected this argument, explaining that the efficient proximate clause rule did not apply in this context. “The efficient proximate cause rule applies only when two or more perils combine in sequence to cause a loss and a covered peril is the predominant or efficient cause of the loss.” (emphasis added). When a covered peril is the “efficient cause” then “the efficient proximate cause rule mandates coverage, even if an excluded event appears in the chain of causation that ultimately produces the loss.”
So you can see how the efficient proximate cause rule is designed to provide coverage when a covered peril causes a loss, but some sort of excluded peril inserts itself in the chain of events. But it’s a pro-coverage rule! It does not apply to exclude a loss “[w]hen an excluded peril sets in motion a causal chain that includes covered perils.”