Washington Appellate Court Explains Efficient Proximate Cause and Ensuing Loss.

In a decision issued today, Vision One, LLC et al. v. RSUI, No. 38411-6 (10/19/2010), Division II of the Washington Court of Appeals explained the efficient proximate cause rule. The case arose out of the collapse of a concrete slab during the construction of a condominium. The developer’s policy excluded loss caused by faulty workmanship, but the exclusion contained an exception for ensuing loss caused by a covered cause.

Division II explained that the efficient proximate cause of a loss is the predominant cause which sets into motion the chain of events producing the loss—not necessarily the last act in a chain of events. Further, whenever covered and excluded perils combine to cause a loss, the loss will be covered only if the predominant or efficient proximate cause was a covered peril. If multiple causes contribute to cause a loss, the tier of fact must determine which cause was the predominant or efficient proximate cause.

The Court of Appeals then explained where an ensuring loss provision is an exception to an exclusion, the provision applies when an excluded peril causes a separate and independent covered peril. Damage caused by the covered peril is covered under the resulting loss provision, but damage resulting from the excluded peril remains excluded:

For example, following the destruction caused by the 1906 San Francisco earthquake, gasfed fires broke out and caused even more damage across the city. Most property insurance policies excluded earthquake damage but covered fire damage. Because an excluded peril (earthquake) caused an independent covered peril (fire), the resulting fire damage was covered as a “resulting loss.” But earthquake damage remained uncovered.

Accordingly, “assuming faulty workmanship caused the shoring and concrete slab to collapse, faulty workmanship was the initial excluded peril and the collapse was the loss.” Therefore, no independent covered peril (such as fire) caused a covered resulting loss. “The collapse resulted directly from the initial excluded peril of faulty workmanship, and loss resulting directly from the initial excluded peril remains uncovered.”

The court also held that:

1. The efficient proximate cause rule is a rule of policy construction. Failure to cite efficient proximate cause in a denial letter does not prevent the application of efficient proximate cause analysis to determine coverage.
2. Determining the cause of collapse is a question of fact for the jury unless the facts are undisputed.
3. When an insurer denies a tender, it is estopped from claiming that it was released from liability based upon the insured's subsequent settlement in violation of an impairment of subrogation provision.

In Fred Shearer & Sons, Inc. v. Gemini Ins. Co., 2010 WL 3768022 (Or App Sep. 29, 2010), the court held that an insurance company could consider materials extrinsic to the complaint and the insurance policy to determine the duty to defend based on the facts presented.

Gemini Insurance Company (the “insurer”) issued insurance to TransMineral, a distributor of a stucco product. The policy had a so-called “vendors endorsement” that provided coverage to “all vendors of [TransMineral]” but “only with respect to ‘bodily injury’ or ‘property damage’ arising out of ‘your products’ … which are distributed or sold in the regular course of the vendor's business,” subject to certain exclusions.

Fred Shearer & Sons (“Shearer”) was a subcontractor on a home repair and installed the stucco product on the exterior of the residence. The product allegedly failed, and the owners of the residence sued their general contractor who, in turn, sued Shearer and TransMineral.

Shearer tendered the defense of the lawsuit to the insurer on the theory that it was an insured as a vendor of TransMineral products. It based the tender on an “Exclusive Applicator Agreement” that it had entered into with TransMineral. That agreement granted Shearer the exclusive right to distribute TransMineral’s products. The insurer rejected the tender.

Shearer brought a (new, separate) lawsuit against the insurer seeking a declaration that it was an insured under the vendors endorsement. Before the trial court, shearer moved for partial summary judgment on this question, and the trial court granted the motion. Additional issues regarding the amount of the defense obligation were tried to the court, and the court again ruled in Shearer's favor. The rulings were reduced to a limited judgment, which the insurer appealed.

The Court of Appeals affirmed the trial court. Before the Court of Appeals, the insurer argued that it was “impossible to tell from the pleadings in the underlying action or the policy language that Shearer sold or distributed the stucco product in the ordinary course of business,” that “the four corners of those documents - that is, the pleadings and the insurance policy - exclusively govern whether [it] owes any duty to defend” and that “nothing in [the underlying] allegations expressly or impliedly connotes that Shearer distributed or sold the TransMineral products.” 2010 WL 3768022 at 3 (internal quotations and some alterations omitted). The Court of Appeals rejected this argument as follows:

“When the question is whether the insured is being held liable for conduct that falls within the scope of a policy, it makes sense to look exclusively to the underlying complaint. …

“The same cannot be said with respect to whether a party seeking coverage is an ‘insured.’ The facts relevant to an insured’s relationship with its insurer may or may not be relevant to the merits of the plaintiff’s case in the underlying litigation. The plaintiff in the underlying case is required to plead facts that establish the defendant’s liability; the plaintiff often is not required to establish the nature of the defendant’s relationship to some other party or to
an insurance company in order to prove a claim….”

Id. at 5. The Court of Appeals also rejected the insurer’s other arguments as to the application of certain exclusions and the calculation and allocation of defense costs.