Opinion ID: 4387386
Heading Depth: 2
Heading Rank: 4

Heading: The Ensuing Loss Exception

Text: Ingenco’s all risks policy excluded losses resulting from “[f]aulty or defective material, faulty workmanship, faulty methods of construction, [or] errors or omissions in plan or specification or designs . . . unless loss by a peril not otherwise excluded ensues . . . .” Ingenco argues that, even if V32’s diffuser basket was defectively designed, and even if its failure therefore constitutes an uncovered “internal” cause of loss, the “ensuing loss” exception quoted above preserves coverage for the post-failure damage to the adsorbent beads throughout the purification system. Ace’s opposition is based largely upon the contention, discussed at length above, that the damage at issue here did not result from an “external cause.” As Ingenco points out, the Washington Supreme Court discussed ensuing loss exclusions in Vision One, LLC v. Philadelphia Indem. Ins. Co., 174 Wash. 2d 501 (2012). As 30 INGENCO HOLDINGS V. ACE AMER. INS. CO. the Vision One court explained, ensuing loss clauses ensure that, where an uncovered event takes place, any ensuing loss which is otherwise covered by the policy remains covered, even though the uncovered event itself is never covered. Vision One, 174 Wash.2d at 515. For example, if a homeowner’s policy excluded losses from faulty workmanship, an electrician’s wiring mistakes would not be covered, even if the policy included an ensuing loss exception. Id. If, however, those uncovered wiring mistakes subsequently caused a fire that then caused additional damage, the fire damage would be covered under the ensuing loss clause. Id. Conversely, for example, if a policy contained an ensuing loss provision but specifically excluded both faulty construction and mold losses, the ensuing loss provision would not preserve coverage where defective construction led to mold damage, because the ensuing mold damage was not “otherwise covered.” Id. “[T]he dispositive question in analyzing ensuing loss clauses is whether the loss that ensues from the excluded event is covered or excluded. If the ensuing loss is also an excluded peril or an excluded loss under the policy, there is no coverage.” Id. at 516. The bulk of the dispute here appears to center on whether Ingenco’s bead-related loss ensued from some other, prior, uncovered loss, or itself constituted the loss. Ingenco concedes that the loss of the V32 diffuser shield was not covered.18 Ingenco argues, however, that because the destruction of the adsorbent beads occurred subsequent to the shield failure, the ensuing loss provision should operate to 18 It is not entirely clear whether Ingenco’s concession is based upon the fact that the basket failed for some excluded reason, the fact that the basket was not an integral part of the nitrogen rejection vessel, or some other reason. INGENCO HOLDINGS V. ACE AMER. INS. CO. 31 cover the bead-related loss, regardless of the fact that the shield failure itself is excluded. In response, Ace argues that “nobody is concerned with damage to the diffuser basket itself,” and thus the bead-related damage is not an ensuing loss, but rather the excluded loss itself. Ace’s argument appears to be inconsistent with its prior assertion that the high-pressure stream of landfill gas was the internal cause of Ingenco’s loss. Vision One counsels that the key question is whether “the loss that ensues from the excluded event is covered or excluded.” Vision One, 174 Wash.2d at 516 (emphasis added). Ace’s understanding of “the excluded event” is difficult to pin down. In the external cause context, Ace argues that the stream of landfill gas was an internal, causative event, and was thus excluded. In the ensuing loss context, in contrast, Ace appears to suggest a different precipitating “excluded event,” suggesting that the breakdown of the adsorbent beads is the primary event. At the same time, however, Ace also states that the loss of the beads was “caused by the diffuser basket’s defective design,” suggesting yet a third potential preliminary, excluded cause. Ace cannot have it both (or all three) ways. Proceeding, therefore, with the understanding that the loss of the adsorbent beads did ensue from some prior, but excluded loss or event, whether it be the stream of gas or the failure of the diffuser shield, the question remains whether the loss of the beads was itself excluded. Vision One, 174 Wash.2d at 516. In other words, to compare these facts to the examples cited in Vision One, is the loss of the beads more akin to the fire damage in the mis-wiring example or to the mold in the defective construction case? We conclude that the answer is the former. Although in the latter example, 32 INGENCO HOLDINGS V. ACE AMER. INS. CO. the mold did ensue from faulty construction, the ensuing loss provision nevertheless did not preserve coverage because mold itself was an excluded peril. Id. Here, there was no specific exclusion regarding the loss of the beads, just as in the mis-wiring example, there was no specific exclusion for fire.19 Thus, even if it were conclusively established that the diffuser shield suffered from some inherent defect, the subsequent destruction of the adsorbent beads would be covered under the policy’s ensuing loss exception.