Ensuing Loss Does Not Resurrect Coverage for Excluded Peril

In Platek v. Town of Hamburg, 2015 NY Slip Op 01483 (Feb. 19, 2015), the New York Court of Appeals reversed a lower court decision and held that an ensuing loss provision is not intended to resurrect coverage for an excluded peril.

The case arose after a ruptured water main caused water damage to a home. The policy excluded coverage for loss “consisting of or caused by… water on or below the surface of the ground, regardless of its source, including water which exerts pressure on, or flows, seeps or leaks through any part of the premises.” An exception to this exclusion provided coverage for “sudden and accidental direct physical loss caused by fire, explosion or theft resulting from [the foregoing exclusion].”

A divided lower court originally found in favor of coverage, determining that the exception for explosions covered the ruptured water main. The discussion centered on the application of the exception to the exclusion, in particular the meaning of the phrase “resulting from.” Applying a technical interpretation, the lower court majority thought the exception was subject to multiple interpretations. Agreeing with the insured’s argument that “resulting from” could reasonably mean “caused by” such that the ruptured water main could constitute an explosion under the exception, the lower court concluded that the ambiguity favored coverage.

But a strong dissent thought the exception was an unambiguous “ensuing loss” provision, with the phrase “resulting from” providing coverage only for those secondary losses that follow from an initial excluded peril. As the dissent noted, “interpreting the exception to cover a loss where an explosion is caused by water outside the residence… contravenes the purpose of the water loss exclusion… Rather, the language ‘resulting from’ is properly interpreted as referring to an ‘ensuing loss,’ i.e. a loss that follows or takes place after an excluded event. In other words, the exception refers to a separate occurrence – fire, explosion or theft – that results from the water damage to the residence, and does not refer to the water damage itself.”

The Court of Appeals agreed with the dissenting judges and reversed the lower court’s decision.

As the Court of Appeals explained, ensuing loss provisions are a product of the San Francisco earthquake of 1906, when “some insurers argued that because earth movement was an excluded peril under property insurance policies, so was the damage caused by the devastating fires sparked by gas emitted from pipes broken by the shaking of the earth, even though fire was a covered peril. The California legislature enacted statutes to prevent insurers from disclaiming coverage in the future under such circumstances. To comply with California law and similar statues enacted by other states, insurers then added exceptions to their earthquake exclusions to preserve coverage for ensuing fires.” Insurers later incorporated ensuing loss provisions into other types of policies. As revealed by the history and purpose of ensuing loss provisions, they do not resurrect coverage for an otherwise excluded peril; they preserve coverage for secondary losses.

The Court noted that where a policy contains an exclusion with an exception for ensuing loss, “courts have sought to assure that the exception does not supersede the exclusion by disallowing coverage for ensuing loss directly related to the original excluded risk.” The policy excluded coverage for water damage and here the only loss occurred from the water main rupture itself. An explosion did not follow from the water damage and characterizing the water main burst as an explosion could not restore the excluded coverage.

Unwilling to contravene the purpose of the water loss exclusion, the Court supported the intent of the ensuing loss provision. As the court stated, policy interpretation requires courts to “construe the policy in a way that affords a fair meaning to all of the language employed by the parties in the contract and leaves no provision without force and effect.”

While the lower court majority suggested that the insurer could have more clearly identified the exception as an “ensuing loss” provision, the Court of Appeals emphasized that the effect of the words—not their label—controls, and it was “unimportant that Allstate did not label the exception an ‘ensuing loss provision,’ or use ‘ensuing from’ instead of ‘resulting from’ in the policy.” According to the Court, the phrases “ensuing loss” and “resulting loss” have been used interchangeably, and the policy’s use of the phrase “caused by” in other places indicates that the parties intended a different meaning for the phrase “resulting from,” consistent with an ensuing loss provision.

The decision should reassure insurers that courts will interpret policies as a whole, giving meaning to each provision in the context of entire policy. The Court of Appeals also reinforced that when it comes to policy interpretation, the content controls, not labels. Ensuing loss provisions are designed to provide coverage for secondary losses following from an excluded peril, but will not supersede an exclusion by restoring coverage where none was intended to exist.