Insurance policy contracts can be confusing, not only because such contracts are extremely lengthy, but also because the language used can be complex and not easily digested. This is true for lay persons and attorneys alike. In a recent Washington appellate case, The Gardens Condominium v. Farmers Insurance Exchange[i], lay persons, attorneys, and even a trial court judge misinterpreted insurance policy contract language, which resulted in further litigation just to resolve the meaning of the policy.
Gardens is a 26-unit condominium. Water damage to the roof from inadequate ventilation was discovered in 2002 and was attributed to a faulty roof design. Repairs to improve ventilation were completed in 2004. In 2019, Gardens found the 2004 repairs were defective as the roof cavities had continued to trap water vapor. Gardens had an insurance policy with Farmers Insurance.
Gardens’ policy with Farmers was “…an all-risk insurance policy…, which covered all ‘direct physical loss or damage’ to the building not specifically excluded by the policy.”[ii] The policy excluded coverage for damage caused by faulty design or repair. However, it also included a resulting loss clause which read, “’if loss or damage by a Covered Cause of Loss results, [Farmers] will pay for that resulting loss or damage.’”[iii]
Gardens requested coverage from Farmers Insurance. Farmers declined, stating the newly required repairs had stemmed from faulty design and repair, both of which exclude coverage. Gardens filed suit and both parties moved for summary judgment. The court granted summary judgment to Farmers, and Gardens appealed.
The summary judgment motions filed by each party relied on stipulated facts. The parties agreed the damage “‘was caused by condensation and/or excess humidity resulting from inadequate ventilation of the roof assembly due to the faulty, inadequate, or defective construction, repairs, and/or redesign.”[iv]
The appellate court looked to how Washington law interpreted resulting loss clauses. In Vision One[v], a floor slab collapsed due to defective workmanship. The collapse led to a need to clean up debris and hard cement from a floor below surface. Vision One had an all-risk contract, which excluded defective workmanship. The Washington Supreme Court found resulting loss clauses carve out exceptions from policy exclusions.[vi] The cleanup of debris and fallen cement was covered under the policy.[vii]
Here, with the resulting loss clause, the court found “Farmers agreed to pay for any loss or damage caused by a covered peril resulting from faulty construction.”[viii] The court concluded “…if the policy covers the perils of condensation and excess humidity, it covers the loss or damage from those perils.”[ix]
Because the trial court did not address the issue of whether water vapor and condensation were covered perils under Farmers’ policy, the case was remanded for further proceedings consistent with the above reasoning. Resulting loss clauses can greatly limit the scope of exclusions to coverage. This case serves as a reminder that all parties to an insurance contract should critically read it to ensure their understanding. Complex policy language may obscure the main point of an insurance contract. It is important not only that all parties have read and comprehend the contract upon signing, but that the language used by the drafter is clear.
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[i] The Gardens Condominium v. Farmers Insurance Exchange, 521 P.3d 957 (2022).
[iii] Id (edit in original).
[v] Vision One, LLC v. Phila. Indem. Ins. Co., 174 Wn.2d 501, 512, 276 P.3d 300 (2012).
[vi] Id, at 513.