The Supreme Court takes a look at Efficient Proximate Cause
This is the fourth installment of posts on Vision One v. Philadelphia Indemnity, a Washington Supreme Court case touching on Washington construction and insurance law. After Williams v. Athletic Field got so much coverage, I wished that I had provided a forum for argument on Builders Counsel. While we await that opinion from the Supreme Court, I decided to let a few good writers have at Vision One here on the blog. Last week, attorney Chris Carr weighed in. Today, insurance expert David Thayer returns to give his final impression. David provided an initial peak at the case earlier this year. Thanks to both Chris and David for contributing to the debate.
In August 2011 the Washington Supreme Court will rule on a pair of joined cases that involve critical insurance coverage issues. The outcome of the ruling will impact a large swath of policyholders in Washington State including builders, developers, and homeowners to name a few.
The cases are Vision One vs. Philadelphia Indemnity Insurance and Sprague vs. Safeco. The Vision one case comes from Division Two of the Appellate Court which overturned a lower court decision in favor the plaintiff, Vision One. Division Two decided that the collapse of a concrete pour during the course of construction did not constitute a resulting loss due to faulty workmanship. They further went on to redefine efficient proximate cause in a way that is harmful to policyholders by broadening rather than narrowing the meaning of exclusionary language in Philadelphia’s Builders Risk Policy.
The second case, Sprague vs. Safeco, arose out of a homeowner’s claim that the collapse of a deck due to faulty workmanship is covered under an exception to the faulty workmanship exclusion, ie resulting loss. Division One of the Appellate Court ruled in favor of the policyholder stating that the collapse is covered as resulting loss.
What to Watch For:
Resulting Loss is a well established concept in insurance circles and most upmarket carriers offer the coverage in their Builders Risk product line. The Washington Supreme Court has a clear choice to make between the appellate decisions since they contradict one another in very analogous lower court cases. This is a tale of two collapse losses where causation was alleged to include faulty workmanship which resulted in opposite conclusions at the appellate level.
Speaking as an insurance expert who underwrote and placed hundreds of Builders Risk programs it would be stunning if the Washington Supreme Court rules in favor of Philadelphia. Why? Because coverage for resulting damage under the faulty workmanship exception is found in the All Risk wording that forms the grant of coverage or Insuring Agreement that in the event a covered cause of loss arises as a result of faulty workmanship coverage obtains.
Efficient Proximate Cause:
The ruling on resultant damage is a big deal but there is a second issue to be decided on, the meaning of Efficient Proximate Cause. This issue is germane to the Vision One case and is the second blockbuster issue the Supreme Court must wrestle with. In both Vision One and Sprague the covered cause of loss was collapse. In the vision case Philadelphia argued there had to be a sequence of events and Division Two took that ball and concluded the collapse was caused by faulty workmanship not an independent covered peril.
It is worth noting that the language of the faulty workmanship exclusion contains the phrase solely and directly. Division Two made quite a leap to find causation limited to faulty workmanship alone. Readers might be shocked to know that most Builders Risk claims are caused by some form of human error that results in a loss. Builders Risk forms are All Risk first party policies that are silent on the matter of blame. The faulty workmanship exclusion found in most Builders Risk policies is intended to exclude the cost of making good poor workmanship. In the case of Vision One Philadelphia’s policy makes no mention of the phrase independent covered peril.
Generally when underwriters intend to exclude the peril of collapse they say so. Philadelphia’s policy had no collapse exclusion. They were never asked to pay for the shoring equipment that failed; they were asked to pay for the damage that resulted from the collapse of concrete and rebar after the shoring equipment failed.
I am not an attorney. My perspective is that of an insurance professional with a deep background in construction risks. I think the Supreme Court has a wonderful opportunity to clarify two of the more important issues for policyholders and carriers who operate in this segment of the insurance market. While writing this article I had informal conversations with several prominent attorneys in the construction arena; they all seem optimistic that the Supreme Court will rule correctly on resultant damage and efficient proximate cause.
The case will be argued in mid-August and a ruling is expected in September 2011.
