Ensuing Loss Provision Salvages Coverage for Water Damage Claim

    The Court of Appeals for the D.C. Circuit reversed the district court's finding of no coverage and found that the ensuing loss provision provided coverage for water damage. 3524 East Cap Venture, LLC, et al. v. Weschester Fire Ins. Co., et al., 104 F. 4th 193 (D.C. Cir. 2024).

    Plaintiff 3534 East Cap Venture, LLC, a real-estate developer, hired plaintiff McCullough Construction, LLC, to build a residential and retail complex. Defendants Westchester Fire Insurance Company and Endurance American Insurance Company issued identical builders' risk policies, which covered the building while it was under construction. Each insurer was responsible for half of any qualifying losses.

    The policies covered loss caused by or resulting from water damage. The policies, however, excluded loss caused by "dampness of atmosphere" or by "[e]xtremes or changes in temperature." But the exclusions contained an exception if "loss by an insured peril ensues." 

    While construction was ongoing, the builder discovered water throughout the building. It turned out that the architect's plans had failed to include a vapor barrier to prevent humid air inside the building from reaching cold, exterior-facing surfaces and then condensing into water. As a result, moisture under the roof condensed during a spell of cold weather. The water then seeped into and soaked building materials such as wood, insulation, and drywall. The builder was forced to replace the damaged materials, at a cost of nearly $1.5 million. The insureds filed claims under the policies, but the insurers denied coverage.

    The insureds filed suit and all parties moved for summary judgment. The district court ruled for the insurers. It held that the ensuing-loss exception to the exclusions did to apply because losses from "water damage" to the building were "inextricably intertwined" with losses covered by the dampness and temperature exclusions.

    The Court of Appeals assumed the loss was caused by "dampness of atmosphere" and "changes in temperature," as urged by the insurers. But it also was physical loss more directly caused "by an insured peril,' namely water damage. The policies provided coverage for losses "caused by or resulting from water damage." The ydefined "water damage" broadly to include "all water damage, except loss caused by or resulting from the peril of flood.

    The damage here -caused by liquid water that had accumulated inside the building- clearly was "loss by" the "insured peril" of "water damage." The only remaining question was whether the water damage "ensued" within the meaning of the policy. The insurers contended that water damage did to ensue from dampness and temperature changes if the dampness and temperature changes directly caused the water damage.

    The court disagreed. First, "ensue" meant to take place afterward or as a result. Here, the water damage occurred both after and as a result of excluded causes of dampness and temperature changes. Second, in construing an ensuing-loss clause, the court had previously determined that the most common meaning of "ensue" was "result from." And third, two interpretive presumptions favored the insureds – the rule that ambiguities must be resolved against the insurer, as well as the rule that policy exclusions must be construed narrowly. 

    Accordingly, the ensuing-loss provision applied and mandated coverage for the losses claimed by the insureds. The judgment of the district court was reversed.