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Sunwood Condominium Association v. Travelers Casualty Insurance Company of America

United States District Court, W.D. Washington, Seattle

November 16, 2017




         This matter comes before the Court on multiple motions: Plaintiff Sunwood Condominium Association's (the “Association”) motion for partial summary judgment against Defendant National Surety Corporation (“NSC”) (Dkt. No. 79); the Association's motion for partial summary judgment against Defendant St. Paul Fire & Marine Insurance Company (“St. Paul”) (Dkt. No. 82); Defendant St. Paul's motion for summary judgment (Dkt. No. 84); and Defendant NSC's motion for summary judgment (Dkt. No. 88). Having thoroughly considered the parties' briefing and the relevant record, the Court finds oral argument unnecessary and hereby GRANTS in part the Association's motions and DENIES Defendants' motions for the reasons explained herein.

         I. BACKGROUND

         The Association maintains the two buildings at issue in this suit. (Dkt. No. 1 at 2.) The exterior walls of these buildings are made of stucco applied over building paper/weather resistant barrier (“WRB”) placed over plywood sheathing. (Dkt. No. 82 at 5.) In November 2014, The Association performed an intrusive investigation that uncovered “water intrusion and hidden damage” to the sheathing, framing, and WRB on exterior walls and decks of the buildings. (Dkt. Nos. 1 at 5, 80-1 at 3, 82 at 1.) On December 12, 2014, the Association submitted an insurance claim to all nine insurers that covered the buildings since their construction around 1980. (Id. at 2-4, 6). The Association and its insurers subsequently performed a joint follow-up investigation. (Dkt. No. 79 at 6.) The resulting report from the Association's expert detailed hidden water damage to sheathing and framing on both buildings. (Dkt. No. 1 at 6) The report found the damage had occurred “incrementally and progressively [during storm events] each year from 1979, ” when wind driven rain penetrated the buildings' exterior cladding. (Dkt. No. 80-1 at 53.) Insurer experts described water intrusion and wood decay “primarily due to . . . an inherent lack of drainage” and inadequate or defective construction. (Dkt. Nos. 79 at 6, 80-1 at 27-28, 82 at 7.) The Association's expert estimated necessary repairs would require removal of all stucco from both buildings at a cost of $2, 789, 155. (Dkt. No. 82 at 7.)

         NSC and St. Paul subsequently denied coverage for the Association's claims. (Dkt. Nos. 80 at 2, 82 at 8.) The Association brought suit on June 29, 2016 against NSC, St. Paul, and other insurers.[1] (Dkt. No. 1 at 6-12.) The Association has settled its claims with all insurers named in its complaint except NSC and St. Paul. (Id. at 3-4). The Association brings a breach of contract claim against both NSC and St. Paul, and claims for violation of Washington claims handling standards, Consumer Protection Act, Insurance Fair Conduct Act, and for bad faith against NSC. (Id.) The Association seeks declaratory relief that insurance policies at issue covered its claim for hidden water damage, as well as monetary costs and damages. (Id.)


         A. NSC

         NSC insured the Sunwood complex from August 2001 to August 2008. (Dkt. No. 1 at 6- 12.) The “all-risk” policy covered “all risks of direct physical loss or damage, except as excluded or limited” therein. (Dkt. No. 80-1 at 7.) Policy exclusions included loss or damage “caused by or resulting from . . . wear and tear, gradual deterioration, inherent vice, latent defect . . . mold, [or] wet or dry rot.” (Dkt. No. 80-1 at 9.) A separate policy section excluded loss or damage caused by “inadequate or defective . . . construction.” (Id. at 10.) Under both exclusion sections, the policy added: “but, if loss or damage from a covered cause of loss results, [NSC] will pay for that resulting loss or damage.” (Id.) (emphasis in the original).

         The Association describes its claim as for a single, progressive loss of “hidden water damage” to building framing and sheathing, caused by a combination of wind-driven rain, weather conditions, repeated seepage of water, and inadequate construction or maintenance. (See Dkt. Nos. 98 at 3, 80-1 at 53.) NSC argues the Association's claim is for multiple discrete losses of “dry rot damage” to building framing and sheathing, caused by inadequate construction that resulted in water intrusion and gradual deterioration. (Dkt. Nos. 88 at 2, 80-1 at 55.)

         B. St. Paul

         St. Paul insured the complex from June 1997 to June 2001. (Dkt. No. 84 at 2.) The policy also covered all non-excluded risks. It excludes “wear and tear; deterioration, mold, wet or dry rot; . . . the inherent nature of the property.” (Id. at 28.) A resulting loss clause applies to these exclusions: “if loss not otherwise excluded results, we will pay for that resulting loss.” (Id.)

         The Association asserts the same theory of loss, causation, and liability against St. Paul. St. Paul argues the Association's loss was caused primarily by faulty construction or latent defects in the building, combined with inadequate maintenance, deterioration, and wear and tear that allowed rain water to intrude behind exterior stucco. (Dkt. No. 82 at 2.) It characterizes the loss as comprised of “numerous separate events and conditions.” (Dkt. No. 85 at 29.)


         A. Summary Judgment

         “The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). The Court must view the facts and justifiable inferences to be drawn therefrom in the light most favorable to the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). Once a motion for summary judgment is properly made and supported, the opposing party “must come forward with ‘specific facts showing that there is a genuine issue for trial.'” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (quoting Fed.R.Civ.P. 56(e)). Summary judgment is appropriate against a party who “fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986).

         B. Interpretation of Insurance Policies

         Courts use a two-step process to determine whether insurance coverage exists: an insured must first show that the policy covers the loss; then to avoid coverage, an insurer must point to specific policy language excluding the loss. Wright v. Safeco Ins. Co. of America, 109 P.3d 1, 5 (Wash.Ct.App. 2004). “Interpretation of the terms of an insurance policy is a matter of law.” Allstate Ins. Co. v. Raynor, 21 P.3d 707, 711 (Wash. 2001). The Court interprets undefined terms in policy language as they would be read by an ordinary insurance consumer. See Moeller v. Farmers Ins. Co. of Wash., 267 P.3d 998, 1002 (Wash. 2011). Inclusionary clauses must “be liberally construed to provide coverage.” Riley v. Viking Ins. Co. of Wisconsin, 733 P.2d 556, 558 (Wash.Ct.App. 1987). “Exclusionary clauses should be construed against the insurer with special strictness.” McAllister v. Agora Syndicate, Inc., 11 P.3d 859, 860 (Wash.Ct.App. 2000).


         The Association seeks a determination that NSC's policies cover the cost of repairing alleged water damage. It also seeks summary judgment on NSC's affirmative defenses based on: (1) NSC's suit limitation clause and (2) failure to mitigate. The Court DENIES the Association's motion for summary judgment on its breach of contract claim and coverage related issues. The Court GRANTS the Association's motion on NSC's affirmative defenses.

         A. Policy Coverage

         The Association argues that NSC's policy covers its loss as a matter of law. The Court disagrees, finding genuine disputes of fact regarding coverage. Without making a coverage determination, the Court resolves several discrete legal issues related to the policy.

         1. Fortuitous Loss

         The Association argues its loss was fortuitous. NSC denied coverage by asserting the loss was not fortuitous because it consisted of “long term damage” from “gradual and accumulated effects” of “recurring weather conditions . . . usual to the area (i.e. rain).” (Dkt. No. 80-1 at 54.) “The proper inquiry is not whether the rain is unexpected, but whether the loss is unexpected.” Babai v. Allstate Ins. Co., . No. C12-1518-JCC, slip op. at 6-7 (W.D. Wash. Oct. 8, 2014). NSC's policy contains no exclusion for rain, and NSC cannot create one with a fortuitousness argument. See Babai, No. C12-1518-JCC, slip op. at 4 (W.D. Wash. Dec. 13, 2013). If a jury finds hidden, unexpected damage at Sunwood was caused by exposure to rain, the loss was fortuitous.

         2. Weather, Wind-Driven Rain, and Repeated Seepage of Water

         The Association argues weather, wind-driven rain, and repeated seepage of water are covered perils under NSC's policy because they are not specifically excluded. (Dkt. No. 79 at 11) (citing Sunbreaker Condominium Assn v. Travelers Ins. Co., 901 P.2d 1079, 1083 (Wash.Ct.App. 1995). The Court agrees. NSC's policy excludes loss or damage caused by “weather conditions” only when combined with earth movement, flood, or other excluded perils not relevant here. (Dkt. No. 80-1 at 10.) It does not mention rain or repeated seepage of water. NSC does not contest that these perils are distinct from inadequate construction, rot, and deterioration. To the extent NSC argues its exclusions for deterioration and rot apply despite the influence of rain, the Court reads this as a causation argument for the jury, not an assertion that rain and water seepage are subsumed under these exclusions. (See Dkt. No. 91 at 7.)

         3. Combination of Covered and Excluded Perils

          The Association argues that when a covered cause of loss (rain water intrusion) combines with an excluded cause of loss (inadequate construction), the resulting loss is covered as a matter of law. (Dkt. No. 79 at 9.) NSC takes the position that rain is too remote to the loss to mandate such coverage. (Dkt. No. 91 at 5.) NSC asserts its exclusions for gradual deterioration and rot apply unless a jury finds that rain alone was the efficient proximate cause of the loss. (Id. at 7.) The Court agrees with NSC that coverage cannot be determined as a matter of law here, but agrees generally with the legal principle the Association asserts-NSC's policy covers an otherwise excluded loss if it is proximately caused by concurrent excluded and covered perils.

         Washington's efficient proximate cause (“EPC”) rule applies “where two or more distinct perils . . . cause a loss, and the policy covers one . . . but not all” perils. Sunbreaker Condo Ass'n, 901 P.2d at 1082-83. It imposes liability “for a loss efficiently caused by a covered peril, even though other, excluded perils contributed to the loss.” Id. The rule does not operate in reverse, automatically mandating exclusion of a loss when an excluded peril is the EPC. Vision One, LLC, 276 P.3d at 30. Specific policy language is required for that result. Id. Unless precluded by policy language, the rule leads to coverage where a covered peril combines with an excluded peril as the concurrent EPC of the loss. See Id. at 310.

         NSC argues Vision One's finding of coverage for concurrent causation is limited to policies that exclude listed perils that “solely and directly” cause a loss. (Dkt. No. 91 at 6.) Instead, NSC would have the Court read its “caused by” exclusion to preclude coverage unless the covered cause of loss is the sole EPC. (See Dkt. No. 91 at 7.) The Association responds that Vision One's holding did not depend on the “solely and directly” language; rather it turned on the principles of the EPC rule and the fact that the policy did not exclude concurrent causes. Id. at 521-22). The Court adopts the Association's reading of Vision One. Accord Greenlake Condominium Association v. Allstate Insurance Co., No. C14-1860-BJR, slip op. at 20-30 (W.D. Wash. Dec. 23, 2015).

         The plain language of NSC's policy supports coverage of concurrent proximate causes. The policy contains an “inverse EPC” clause in an exclusion paragraph not relevant here. (Dkt. No. 80-1 at 8.) Section D.1 excludes loss or damage “regardless of any other cause or event that contributes concurrently or in any sequence of the loss.” (Id.) A court must construe an insurance policy as a whole. Transcontinental Ins. Co. v. Washington Public Utilities Sys., 760 P.2d 337, 339 (Wash. 1988). The application of a concurrent cause exclusion to other perils but not to the ones at issue here is indicates an intent to cover the damage or loss here if it results from concurrent covered and excluded causes. Whether excluded and covered perils were concurrent efficient proximate causes of the Association's loss is a question for the finder of fact.

         4. Ensuing Loss Provision

         The Association's argues that NSC's ensuing loss provision still provides coverage where an excluded peril is the sole EPC of a loss, and the resulting peril or loss is covered. (Dkt. No. 79 at 14, 15.) Ensuing loss clauses “ensure that if [a] specified uncovered events takes place, any ensuing loss which is otherwise covered by the policy will remain covered.” Vision One, 276 P.3d at 307. NSC's ensuing loss provision states “if loss or damage from a covered cause of loss results, NSC will pay for the resulting damage.” (Dkt. No. 80-1 at 9.) By these terms, if an excluded peril (e.g. inadequate construction) brings about a covered peril (e.g. rain intrusion, repeated water seepage, or water damage), any resulting damage is covered.

         NSC attempts to avoid this result by arguing there is no covered ensuing loss here as a matter of law. (Dkt. No. 91 at 8-9.) NSC relies on Sprague v. Safeco Ins. Of Am., to assert that “there is no damage beyond the defectively constructed exterior wall, ” an excluded loss itself. (Dkt. No. 91 at 8-9) (citing 276 P.3d 1270, 1272 (Wash. 2012) (denying coverage under an ensuing loss provision where damage did not extend beyond excluded rot and construction defects in a wall). But Sprague's holding rested on an absence of facts showing the occurrence of the Association's asserted covered loss-collapse. Id. Here, the Association presents facts to show its asserted covered losses-rain intrusion and water damage-occurred. NSC argues “water intrusion through walls” cannot be a separate resulting loss from construction defects. (Dkt. No. 91 at 9) (citing Wright, 109 P.3d at 5) The court in Wright held that water leaks were not covered as an ensuing loss of construction defects, where the policy excluded loss caused “directly or indirectly by construction defects.” Id. NSC's policy contains no such limitation. The resulting loss provisions in Sprague and Wright are distinct from this case. Both hinge on whether the resulting loss was covered. 276 P.3d at 1272 (“any ensuing loss not excluded is covered”); 109 P.3d at 5. In contrast, NSC's provision depends on whether the loss results from a covered cause. (Dkt. Nos. 95 at 6, 80-1 at 9) (“if loss or damage from a covered cause of loss results, we will pay for that ...

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