In their opinions

Instead of carving out an exception to this exclusion, this theory of interpretation would create a virtual, if not complete, exclusion of the exclusion.

6th U.S. Circuit Court of Appeals Judge Jeffrey S. Sutton’s response in TMW Enterprises, Inc. v. Federal Insurance Co. to an insurance claimant’s argument that coverage was due for water damage, which was not an excluded peril, caused by faulty workmanship, for which coverage was excluded.

TMW bought a condominium building. As later discovered by TMW’s renovators, it needed some work, $3.9 million worth, to fix structural problems caused when the original builder “improperly constructed exterior walls, leaving them vulnerable to water infiltration.”

No problem, said TMW as it filed an insurance claim against its $10 million policy with Federal.

Problem, Federal replied. The policy excludes damages for faulty workmanship.

No problem, said TMW. It wasn’t the workmanship that caused the damage, it was the water that came into the building due to the faulty workmanship. And, we notice, water damage is not an excluded peril, so please pay up.

Problem, said Sutton.

As an “all-risk” policy, this insurance policy basically covers everything unless specifically excluded. That means the number of possibilities for last-in-time “but for” causes of damage are limited only by the imagination of the reader.

What if a roof contains a flawed design (think Frank Lloyd Wright, see Essex Ins. Co. v. Fidelity & Guar. Ins. Underwriters, Inc., 282 F. App’x 406, 409 (6th Cir. 2008)), and it leaks water into the house, which ruins one of the floors? But for the water, no damage to the floor would have occurred. Yet the contract does not exclude damages caused by “water.” Coverage?

What if faulty construction allows humid summer air to enter the building, which rusts metal fixtures? But for the exposure to the summer air, no damage to the fixtures would have occurred. Yet the contract does not exclude damages caused by “air.” Coverage?

What if a poorly constructed ceiling beam falls, smashing the floor below? But for the force of gravity, no damage to the floor would have occurred. Yet the contract does not exclude damages caused by “gravity.” Coverage?

As in each of these examples, so too here: The very risk raised by the flawed construction of a building came to pass.

To say that the risk was not covered because other elements or natural forces were the last causative agents of the damage, though to be sure utterly foreseeable causes of the damages, is to eliminate the exclusion.
It is exceedingly strange to “think that a single phenomenon that is clearly an excluded risk under the policy was meant to become compensable because in a philosophical sense it can also be classified as water damage.” Aetna Cas. & Sur. Co. v. Yates, 344 F.2d 939, 941 (5th Cir. 1965) (Friendly, J., sitting by designation).

But all is not lost for TMW, said Sutton.

As the district court viewed the dispute, the identification of the faulty workmanship exclusion, together with undisputed factual evidence that there was a “but for” causal relationship between the damages and this exclusion, meant that summary judgment for Federal was in order.

In view of the reality that the “ensuing loss” clause, under either way of looking at it, does not permit Federal to deny coverage for losses not proximately caused by faulty workmanship, and in view of the fact that TMW did not appear to have an opportunity to seek coverage for such losses, we think TMW should be given an opportunity to do so on remand.

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