Source FC&S Expert Coverage Interpretation
Ensuing Losses Summary: Ensuing losses are exceptions to an exclusion found in many homeowner policies. Questions arise as to what exactly is an ensuing loss, and how does that differ from a direct loss. This article tackles that question.
Topics covered:
Introduction
Definition
Direct Damage
Ensuing Loss
Conclusion
Introduction
In the perils insured against section of the ISO HO 00 03 05 11, under coverages A and B, the policy states that losses caused by collapse, freezing, theft under construction, vandalism, mold, wear and tear, pollution, birds, rodents, insects, or animals owned by an insured are excluded. However, any ensuing loss from these excluded perils that is not precluded by any other provision in the policy is covered. Similar language appears in the exclusions section. Losses caused by weather conditions, but only if they contribute with an excluded cause or event listed in the rest of the exclusions, or acts of a person, group, governmental body, or faulty, inadequate, or defective workmanship, construction, planning, renovation, or materials used in repair, construction, renovation or maintenance are excluded. Ensuing losses from these exclusions to property in coverage A or B that are not precluded by other policy provisions are covered. The most common ensuing losses are fire and water. The issue then is determining what is an ensuing loss instead of a direct loss.
Definition
The policy itself does not define ensue, so a standard desk reference is used. Merriam Webster online defines ensue as to take place afterward or as a result. The Free Online dictionary defines it as to follow as a consequence or result; to take place subsequently. Ballentine’s Law Dictionary 3rd edition defines ensue as to follow or come after, sometimes importing a connection with that which proceeds. Couch on Insurance 3rd Edition defines “ensuing loss” as “loss which follows as a consequence of some preceding event or circumstance.” The intent is the same; ensuing damage is damage that follows the original peril. It can be thought of as a second step in the chain of events. The ensuing loss must follow and grow out of the original loss.
Direct Damage
Direct damage is the immediate result of the peril, and is the first damage in a chain of events if there is one. Wear and tear may cause a pipe to leak, which causes water damage to walls and floors. The wear and tear of the pipe is the direct damage. Even though it is something that occurs slowly over time, it is damage in and of itself, and as such is direct damage. While the water damage is a natural occurrence when there is a worn pipe, it is still ensuing damage. Damage that naturally follows the original damage is ensuing damage, no matter how closely the two are tied together. Termites chewing on the studs in the wall are direct damage. The termites themselves are not damage, their action is. If a neighboring plant generates smoke that gets into the insureds home and covers walls and belongings, that is direct damage. There is no preceding action at the insured location to the presence of the smoke; the smoke itself is the damage. Likewise, the settling of a foundation over time is direct damage. There is no outside cause. All these are excluded perils, and the results listed are excluded results since they are direct damage.
In Sharp v. State Farm Fire & Cas. Ins. Co., 938 F. Supp. 395 (W.D. Tex. 1996), a plumbing leak caused the foundation to shift. The insureds filed a claim and the carrier denied it, stating the exclusion for foundation movement. The policy excludes coverage for settling, cracking, bulging of foundations; however, ensuing loss caused by water damage is covered if the loss would otherwise be covered. State Farm argued that the exception for ensuing loss did not apply since the water was the cause of the loss, and not the result of the loss. The court agreed. The water damage was prior to the loss not subsequent, and is not an ensuing loss. Even though the water leak was not excluded, the shifting of the foundation (the ensuing loss) was. Ensuing losses are only covered if they are not otherwise excluded elsewhere in the policy.
Ensuing loss
As indicated earlier, an ensuing loss follows an original loss; it is a consequence of something. The water from the worn pipe is a consequence of the worn pipe. If termites chew through studs so that the porch collapses, the collapse of that porch is ensuing damage. The direct damage is the damage to the studs by the termites.
In Arnold v. Cincinnati Ins. Co. 688 N.W.2d 708 (2004), the insured sued the carrier to recover for exterior and interior damage from the stripping and restaining of their siding. The Circuit Court entered summary judgment in favor of the insurer and the insureds appealed. The Court of Appeals held that the faulty workmanship exclusion applied and that damage to the interior from the power washer spray was not covered. However the loss caused by rain that leaked in from caulking damaged by the faulty workmanship was covered as an ensuing loss. The faulty workmanship includes the damage to the siding, the damage caused by failure to use protective coverings while doing the work, failure to properly use the pressure washer, and failure to properly clean up after working on the siding. The direct damage was the faulty workmanship which damaged the caulking, and the ensuing loss was the rain that was let in by the damaged caulking. The rain loss followed and was allowed to happen because of the original damage that was excluded.
Conclusion
Direct losses and ensuing losses can be confusing, especially when ensuing losses from an excluded loss are covered. It is important to remember that the initial damage is the direct loss, and anything following is an ensuing loss, even when it seems like the natural result of the direct loss. An example is a water tank that gets smashed and leaks; while it’s natural to expect a smashed water tank to leak, the smashing of the tank is separate from any damage caused by water that leaked out. The direct loss is loss to an object, and the ensuing loss is loss caused by the effects of damage to the object.
Source FC&S Expert Coverage Interpretation
