Except in Suing the Ensuing Loss Exception

PROPERTY – HOMEOWNERS POLICY – DEFECTIVE WORKMANSHIP EXCLUSION – ENSUING LOSS EXCEPTION – BURDENS OF PROOF

Ewald v. Erie Ins. Co. of New York
(4th Dept., 3/17/2023)

What happens when your bathroom remodeling contractor uses the wrong plumbing glue to connect PEX tubing to PVC adapters?

The Ewalds hired contractors to remodel the bathroom in the owners’ suite on the second floor of their home.  The project included construction of a walk-in shower. Toward the end of the multi-week job, the remodeling project was nearly finished and the shower was complete, with only finishing materials left to be installed.  The contractor stopped working one day in the late afternoon and the Ewalds, who were not sleeping in their owners’ suite during the renovation and had not noticed any issues with the bathroom that day or night, eventually went to sleep in other rooms in the house. When they awoke the following morning, however, they observed significant amounts of water flowing and pooling throughout the entire house. They immediately shut off the water supply and called a plumber, who opened the wall of the renovated shower in which the plumbing was enclosed and then capped a leak in the plumbing. The house sustained extensive water damage, and the Ewalds promptly reported the loss to their homeowners insurer, Erie Insurance. A forensic inspection by an engineer retained by Erie later revealed that the water loss from the plumbing behind the sheetrock of the renovated shower was caused by a failure of a glued connection between different types of plumbing due to the contractors’ use of incorrect solvent adhesion materials and methods.  

Erie denied coverage based on various policy exclusions, including the policy’s faulty workmanship exclusion, which provided that Erie would “not pay for loss resulting directly or indirectly from…faulty or inadequate workmanship [or] construction” “even if other events or happenings contributed concurrently, or in sequence, to the loss[.]”

The Ewalds sued and, following discovery, moved for summary judgment, arguing that the cited policy exclusions added that “any ensuing loss not excluded is covered” and pointing out that “within days of the loss, Erie’s experienced, large-loss claims adjuster, after noting the ensuing loss exception wrote in Erie’s internal claims file that “the ensuing water damage as a result of the faulty  workmanship/plumbing appears covered since it is not excluded.”  Attaching copies of the summonses and complaints from three subrogation actions, Ewalds’ counsel also argued that “Erie’s own practice confirms that a loss of this type is a covered ‘ensuing loss’ [inasmuch as] Erie routinely files subrogation actions in which it seeks to recover from allegedly negligent contractors money it paid to its insureds for water damage.”  

Erie cross-moved for summary judgment, arguing that: (1) the loss was excluded because it was “caused by, resulting from, contributed to or aggravated by faulty or inadequate” workmanship, construction or materials used in construction; or (2) the Ewalds’ loss was not an “ensuing loss”.  

In DENYING the Ewalds’ motion and GRANTING Erie’s cross motion for summary judgment, Supreme Court held that Erie “has shown that the loss clearly is excluded elsewhere as it was unequivocally caused by plumbing techniques not used in construction projects, specifically the PVC cement used to connect the PEX tubing and PVC adapters/elbows.” With respect to the faulty workmanship exclusion’s ensuing loss exception, the motion court found that “Plaintiff s analysis that the burst pipe alone constitutes a loss under the policy and that the water damage qualifies as an ensuing loss is flawed.”

The Appellate Division, Fourth Department, unanimously disagreed, REVERSING Supreme Court’s order that had granted summary judgment to Erie and denied summary judgment on liability to the Ewalds, In reinstating the Ewalds’ complaint and sending the action back to Supreme Court for an assessment of damages, the Fourth Department reviewed the history and courts’ interpretation of a property insurance policy’s ensuing loss exception to various property policy exclusions:

“[A]lthough the insurer has the burden of proving the applicability of an exclusion . . ., it is the insured’s burden to establish the existence of coverage” (Platek v Town of Hamburg, 24 NY3d 688, 694 [2015]). “Thus, `[where] the existence of coverage depends entirely on the applicability of [an] exception to the exclusion, the insured has the duty of demonstrating that it has been satisfied'” (id.). The exception to the exclusion at issue here is “an ensuing loss provision, which `provide[s] coverage when, as a result of an excluded peril, a covered peril arises and causes damage'” (id. at 695). “These provisions are a product of the San Francisco earthquake of 1906. In the wake of that natural disaster, some insurers argued that because earth movement was an excluded peril under property insurance policies, so was the damage caused by the devastating fires sparked by gas emitted from pipes broken by the shaking of the earth, even though fire was a covered peril. The California Legislature enacted statutes to prevent insurers from disclaiming coverage in the future under such circumstances. To comply with California law and similar statutes enacted by other states, insurers then added exceptions to their earthquake exclusions to preserve coverage for ensuing fires. Ensuing loss clauses were subsequently incorporated into other types of exclusions, for example, exclusions in all risks policies for faulty workmanship” (id.). “Thus, true to its historical origins and purpose, the ensuing loss exception preserve[s] coverage for insured losses, such as the fires after the San Francisco earthquake, and [does not] create a grant-back through which coverage may be had for the original excluded loss, whether it be an earthquake, a design defect, or any other excluded cause of loss” (id. [internal quotation marks omitted]).Given the aforementioned, “`[w]here a property insurance policy contains an exclusion with an exception for ensuing loss, courts have sought to assure that the exception does not supersede the exclusion by disallowing coverage for ensuing loss directly related to the original excluded risk'” (id. at 694; see Narob Dev. Corp. v Insurance Co. of N. Am., 219 AD2d 454, 454 [1st Dept 1995], lv denied 87 NY2d 804 [1995]). For example, “where the policy excluded losses for faulty workmanship, [a] court rejected the insured’s claim for the collapse of a defectively designed facade, explaining that `[a]n ensuing loss provision does not cover loss caused by the excluded peril, but rather covers loss caused to other property wholly separate from the defective property itself'” (Platek, 24 NY3d at 694, quoting Montefiore Med. Ctr. v American Protection Ins. Co., 226 F Supp 2d 470, 479 [SD NY 2002]). “Stated another way, an ensuing loss at least requires a new loss to property that is of a kind not excluded by the policy . . .; it [does not] resurrect coverage for an excluded peril” (id. at 695 [internal quotation marks omitted]).Conversely, an insured “would be entitled to coverage under an exception for ensuing loss . . . if and to the extent that [the insured] c[an] prove that `collateral or subsequent’ damage occurred to other insured property as a result of the [excluded peril]” (Montefiore Med. Ctr., 226 F Supp 2d at 479, quoting Narob Dev. Corp., 219 AD2d at 454). For example, where an all-risk policy excluded coverage for faulty workmanship and the insureds claimed coverage for damage to their home arising from a fire that was caused by improper conditions in an electrical junction box, the Second Department determined that the ensuing loss exception to the exclusion applied to provide coverage for the fire loss because “[t]he evidence in the record demonstrated that the fire occurred two years after the alleged faulty workmanship related to the junction box, and caused ensuing loss to property `wholly separate from the defective property itself'” (Fruchthandler v Tri-State Consumer Ins. Co., 171 AD3d 706, 708 [2d Dept 2019]).

Here, plaintiffs established, and defendant does not dispute, that they sustained “direct physical loss to property insured under” the policy in the form of extensive water damage to their house for which defendant would be obligated to pay unless the loss was excluded elsewhere under the policy. Not only is any direct physical loss to property covered unless specifically excluded, the policy expressly provides that there is coverage for a “sudden and accidental” loss caused by water leakage from a plumbing system.

Defendant nonetheless denied plaintiffs’ claim for coverage on the ground that it was not obligated to “pay for loss resulting directly or indirectly from” various exclusions, including the faulty workmanship exclusion for loss “caused by, resulting from, contributed to or aggravated by faulty or inadequate . . . design, development of specifications, workmanship, construction[, or] materials used in construction . . . of or related to property whether on or off the `residence premises’ by any person, group, organization, or governmental body.” Defendant supported the denial with the forensic inspection report, which showed that the water leakage from the plumbing for the renovated shower was caused by a failure occurring in a glued connection between certain piping materials, namely, the contractors employed incorrect solvent adhesion materials and methods. In seeking to establish coverage, plaintiffs rely upon the ensuing loss exception to the faulty workmanship exclusion, which provides that “[a]ny ensuing loss not excluded is covered.” Consequently, inasmuch as “`the existence of coverage depends entirely on the applicability of [an] exception to the exclusion, [plaintiffs] ha[ve] the duty of demonstrating that it has been satisfied'” (Platek, 24 NY3d at 694). Plaintiffs have met that burden.The record establishes that the contractors performed defective work on the plumbing system for the renovated shower by using an improper adhesion material on a pipe connection and enclosed that faulty pipe work in the wall of the bathroom at some unknown point during the two weeks prior to the leak. The plumbing connection subsequently failed, which resulted in the discharge of water from the plumbing that traveled throughout the house, causing extensive water damage. We conclude that the ensuing loss exception applies to provide coverage for the household water damage because the excluded peril of faulty workmanship resulted in “collateral or subsequent damage” (Narob Dev. Corp., 219 AD2d at 454) “to property `wholly separate from the defective property itself'” (Fruchthandler, 171 AD3d at 708), and plaintiffs’ claim is for “a new loss to property that is of a kind not excluded by the policy,” i.e., sudden and accidental water leakage from within a plumbing system (Platek, 24 NY3d at 695 [internal quotation marks omitted]). In other words, the ensuing loss exception provides coverage here because, as a result of an excluded peril (faulty workmanship), a covered peril arose (water discharge from a plumbing system) and caused other harm (water damage) to separate property (areas throughout the house) (see generally id.).Indeed, we conclude that the circumstances in Fruchthandler are functionally equivalent to the circumstances in the present case inasmuch as the excluded peril of faulty workmanship gave rise to defective property (junction box; plumbing), which subsequently resulted in conditions (electrical fire; discharged water) that caused the claimed damage to property (the respective houses) other than the subject of the faulty work. Defendant’s attempt to distinguish Fruchthandler is unavailing. The language of the exception here does not include a requirement that the excluded faulty workmanship and the ensuing loss be separated by any specific amount of time, and there was no such requirement noted in Fruchthandler either. Not only would a specific temporal requirement be atextual, there would be no principled manner to determine whether an adequate amount of time had passed for the claimed damage to constitute an ensuing loss. In our view, the better reading of Fruchthandler is that the Second Department simply used the fact that the fire occurred two years after the improper work, which was particular to that case, to emphasize that the claimed loss (fire damage to the house), which was covered under the all-risk policy, was wholly separate from the defect in the property that was created by the faulty workmanship (junction box), which was excluded from coverage (see Fruchthandler, 171 AD3d at 706-707).We also reject defendant’s assertion and the court’s conclusion that plaintiffs are attempting to resurrect coverage for an excluded peril. To the contrary, as plaintiffs correctly contend, they are not attempting to resurrect coverage for an excluded peril because sudden and accidental leakage of water from a plumbing system is a covered peril under the all-risk policy, and they are not seeking coverage for the cost of correcting the faulty workmanship, i.e., repair of the plumbing defect itself. In that regard, we agree with plaintiffs that “[t]his case is distinguishable from those cases [relied upon by defendant] where the insured sought coverage under an ensuing loss exception for the cost of correcting the faulty or defective workmanship” (id. at 708; cf. Platek, 24 NY3d at 695-697; Copacabana Realty, LLC v Fireman’s Fund Ins. Co., 2013 NY Slip Op 30960[U], *1-5 [Sup Ct, Suffolk County 2013], affd 130 AD3d 771 [2d Dept 2015], lv denied 26 NY3d 911 [2015]; Broome County v Travelers Indem. Co., 125 AD3d 1241, 1244-1245 [3d Dept 2015], lv denied 25 NY3d 908 [2015]; Narob Dev. Corp., 219 AD2d at 454). Here, by contrast, plaintiffs seek coverage not for fixing or repairing the plumbing, but rather for the extensive damage that ensued elsewhere throughout the house as a result of the discharge of water from the previously installed and enclosed plumbing system of the renovated shower.

We have considered the remaining assertions of defendant regarding the purported inapplicability of the ensuing loss exception and conclude that they are without merit. Based on the foregoing, we conclude that plaintiffs’ claim for water damage to their house is covered under the ensuing loss exception to the faulty workmanship exclusion in the policy. 

Let’s review:

A property policy’s ensuing loss exception applies when the policyholder established that:

as a result of an excluded peril (such as faulty workmanship)a covered peril arose (such as water discharge from a plumbing system)that caused subsequent harm or damage (such as water damage)to property other than the defective property itself (such as areas throughout the house).

Got it?