Insurer Is Estopped to Invoke Impairment of Recovery Clause after Denying Coverage, But Wins New Trial on Causation Issues that Determine Coverage

Vision One, LLC v. Philadelphia Indemnity Insurance Co. (Wash. Ct. App. Division Two, October 19, 2010)

Shoring equipment supporting a poured concrete slab collapsed during construction of a condominium.  The developer, Vision, made a first-party claim under its insurance policy with Philadelphia Indemnity.  Philadelphia denied the claim under an exclusion for loss caused by defective design or faulty workmanship.  Vision sued Philadelphia alleging breach of contract, bad faith, and violations of the Consumer Protection Act (CPA).  Vision argued there was coverage under an exception to the faulty work exclusion, for loss resulting from a covered cause of loss.  Vision also sued its concrete contactor, D&D Construction, but settled with D&D and also released a shoring equipment subcontractor hired by D&D. 

The trial court denied Philadelphia’s motion to dismiss Vision’s breach of contract claim under a clause in the insurance policy that relieved Philadelphia of any coverage obligation if the insured impaired its right of recovery from others responsible for the loss.  The Court of Appeals affirmed.  Although this was an issue of first impression in Washington, the Court of Appeals agreed with “many other jurisdictions” in holding that “when an insurer denies liability and the insured settles with the tortfeasor, the insurer is estopped from claiming that the insured breached the policy by impairing the insurer’s recovery rights.” 

Regarding coverage, before trial, the trial court ruled that if the loss was caused by a combination of covered and excluded perils, the loss is covered.  The trial court ruled that the shoring equipment and concrete slab were “separate and distinct” and, thus, the collapse was covered under the resulting loss exception to the faulty work exclusion.  The jury determined the amount of damages from the loss and also found bad faith and CPA violations.  The trial court entered a judgment in excess of $3 million, including nearly $2 million in attorney’s fees and costs. 

The Court of Appeals reversed the judgment, reasoning that the trial court’s rulings on coverage contradicted the efficient proximate cause rule by enforcing coverage as long as one of the contributing causes was a covered peril.  Under the efficient proximate cause rule, when loss resulted from both covered and excluded perils, the loss is covered only if the predominate or efficient proximate cause was a covered peril. 

In addition, the Court of Appeals held that, because the resulting loss exception is an exception to the faulty work exclusion, the trial court’s ruling that the collapse was covered under the resulting loss exception was essentially a ruling that it was caused by faulty workmanship.  But determining the cause of the collapse was a question for the jury because the facts were disputed.  The Court of Appeals went on to hold that, assuming the collapse was caused by faulty workmanship, “faulty workmanship was the initial excluded peril and the collapse was the loss.”  As such, “[t]here was no independent covered peril…that caused a covered resulting loss,” and the resulting loss exception would not apply.