Missouri Court Clarifies What Constitutes An Ensuing Loss

Last week in Performance Arts Cmty. Improvement Dist. v. ACE Amer. Ins. Co., 2015 WL 3491292, 2015 U.S. Dist. LEXIS 71592 (W.D. Mo., June 3, 2015), a federal court in Missouri shot down an insured’s arguments that a wall collapse caused by the excluded peril of defective design was a covered ensuing loss under a builder’s risk policy.  The developer admittedly erred in calling an for excess amount of concrete slurry to be pumped behind the structure, but the policyholder contended that the collapse that that mistake caused was a separate loss by “excessive lateral pressure.”  The court analogized to that to arguing that the collapse of a defectively-designed building was a separate loss caused by the covered peril of gravity.

shutterstock_160130774The policyholder had contracted for the construction for a parking garage adjacent to a performing arts center in Kansas City, and the project included the installation of a 50’ high concrete retaining wall between the structure and an adjacent limestone rock face.  The original design called for up to 18” of concrete slurry to be poured between the wall and the limestone embankment, but, at the general contractor’s insistence, it was modified to permit up to 36” of the fill material to be installed. While the slurry was being pumped in place, the wall cracked and failed, and it was uncontested that the change to 36” of fill was a design defect.

The insured made claim under its builder’s risk policy, but the carrier denied because the contract of insurance barred coverage for a loss caused by “[e]rror, omission or deficiency in design, plans, specifications, engineering or surveying.”  That exclusion was prefaced by an ensuing loss exception that restored coverage when “direct physical loss or damage by an insured cause of loss ensues,” however.  The policyholder brought suit, contending that excessive pressure caused by the additional fill constituted a covered ensuing loss.

Last Wednesday, the Western District of Missouri granted the carrier’s motion for summary judgment, holding that the insured’s arguments were “not legally viable.”  As Senior District Judge Ortrie Smith explained, the policyholder’s contention sought “to separate the defective design from the losses incurred because the defective design was actually utilized” which was tantamount to saying that the only loss that was but wasn’t excluded was the cost of obtaining non-defective plans.  That effectively meant that “the ensuing loss exception … swallow[ed] the exclusion to which it [was] appended.”

The court held that an ensuing loss must be a distinct loss that comes after the excluded loss.  In words of the opinion:

an ensuing loss is one that occurs subsequent to the excluded loss.  Plaintiff characterizes the wall’s physical failure as an “ensuing loss” by characterizing the provision of defective plans as an event distinct from the use of those plans to create a wall that was defective.  The problem is that there was only one event and only one loss so there is nothing “ensuing[.]”

* * *

If a defective-designed building collapses, one does not characterize the effect of gravitational forces as a distinct and separate event, and the cost of replacing the collapsed building is not an ensuing loss.  Similarly – as here – if a defectively designed retaining wall fails to retain the pressure it was intended to retain, one does not characterize the pressure as a distinct and separate event, and the resulting need to replace the defectively designed wall is not an ensuing loss.

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About The Property Insurance Law Observer
For more than four decades, Cozen O’Connor has represented all types of property insurers in jurisdictions throughout the United States, and it is dedicated to keeping its clients abreast of developments that impact the insurance industry. The Property Insurance Law Observer will survey court decisions, enacted or proposed legislation, and regulatory activities from all 50 states. We will also include commentary on current issues and developing trends of interest to first-party insurers.
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