Win Some, Lose Some: Wear and Tear, Deterioration, Needs to be Established by a Preponderance of the Evidence

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Construction Defect Exclusion Established While Deterioration Exclusion Must be Determined at Trial

A house that was defectively constructed was damaged slowly over a long period of time because the defects allowed entry of water that eventually caused portions of the house to deteriorate and cause damages that cost more than $300,000 to repair. The owner made a claim to the homeowners insurer who rejected the claim because of exclusions for defective construction, wear and tear, and deterioration and the insured sued and faced a motion for summary judgment in George H. Rountree v. Encompass Home And Auto Insurance Company, CV 619-008, United States District Court For The Southern District Of Georgia Statesboro Division (September 17, 2020)

BACKGROUND

This case arises from damage allegedly caused by faulty workmanship on Plaintiff George Rountree’s Statesboro, Georgia home. Plaintiff first became aware of issues with his home in “early 2017” when his wife, Anne Rountree, noticed sagging trim above the garage door. Plaintiff hired Tim Durden to repair the home. Mr. Durden observed workmanship defects in the flashing, weatherproofing, and shingles that led to substantial water intrusion and damage. Architect Frank D’Arcangelo assessed the home and made similar findings and concluded that these construction defects would have been present when the house was constructed. Mr. D’Arcangelo and Mr. Durden both described much of the damage as “deterioration.”

Plaintiff incurred over $300,000 in expenses in repairing and remediating the water damage and defective construction, which included removing and replacing the entire roof and all of the flashing.

Plaintiff maintains a home insurance policy with Encompass that provides coverage for all claims or damages not otherwise excluded by the policy. One exclusion excludes coverage for damage to the covered real property due to faulty, inadequate, or defective workmanship. However, any ensuing loss not excluded or excepted in this policy is covered.

Another provision of the policy – referred to as the “deterioration exclusion” – excludes coverage for losses “caused by or consisting of: (1) Wear and tear, aging, marring, scratching or deterioration; . . . (3) Rust or other corrosion . . . .”

Plaintiff asserts a breach of contract claim, alleging that Encompass’s denial of coverage is a breach of the policy. Encompass moved for summary judgment on the portions of Plaintiff’s claim that are not covered by the policy.

DISCUSSION

There are three issues in this case:

  1. Whether Plaintiff’s claim was timely filed.
  2. Whether and how the ensuing loss provision applies.
  3. Whether the policy’s exclusions apply to Plaintiff’s losses.

Insurance Contracts in Georgia

In Georgia, three well known rules used in the construction of insurance contracts apply. Any ambiguities in the contract are strictly construed against the insurer as drafter of the document; any exclusion from coverage sought to be invoked by the insurer is likewise strictly construed; and insurance contracts are to be read in accordance with the reasonable expectations of the insured where possible.

The Contractual Limitations Period

The Encompass policy contains a contractual limitations period, which requires any suit on the policy to be brought within two years of the inception of the loss. “Inception of the loss” is not defined in the policy. Georgia courts enforce contractual limitations periods in insurance policies. While water may have begun to intrude shortly after the completion of construction, it did not do so instantaneously as Encompass argues; the water must have intruded at some point between the completion of construction and Plaintiff’s discovery of the damage.

“Inception of the loss” can be a nebulous moment in time. In cases of discrete or acute loss, such as a fire, the inception of loss is the date of the fire. The problem in the case at hand is that the damage began on a date unknown following the faulty construction but continued and worsened until discovery. Unlike a fire, latent and progressive damage like mold, wet rot, and water intrusion can fester undetected for years. Many states apply a “delayed discovery” rule, which treats latent and progressive losses as having occurred on the earlier of either the discovery of the loss or when a reasonable insured would have become aware of it. The discovery rule is a logical one to apply to this type of loss.

The Ensuing Loss Provision

Encompass argues that all of Plaintiff’s claims flow from defective construction and thus are excluded from coverage under the defective construction exclusion unless the ensuing loss exception applies. Defined generally, an ensuing loss provision provides coverage for loss which follows as a consequence of some preceding excluded event or circumstance. Logically and by the policy language, if both causes are excluded, the ensuing loss provision does not apply and there is no coverage for the loss.

The purpose of the ensuing loss provision is to ensure that the insurer does not try to avoid coverage for a covered loss by attributing that loss’s cause to an excluded loss. The ensuing loss provision does not provide for any coverage independent of already existing coverage. In other words, if an ensuing loss is otherwise excluded, it remains excluded.

Exclusions

Encompass invokes the defective construction and deterioration exclusions.  As for any of the losses caused by defective construction, summary judgment for Encompass is appropriate because these are losses excluded under the policy and there is no dispute of fact as to their classification. This would include the improperly installed flashing, weatherproofing, roof edge, and shingles, as well as any other repairs necessary to properly address those issues – like replacing the roof.

Deterioration

This leaves discussion of losses designated as “deterioration.” Encompass points to numerous examples of “deterioration” caused by water exposure, including Mr. Durden’s testimony that approximately fifty percent of the home’s sheathing had deteriorated. The Encompass policy excludes coverage for “wear and tear, aging, marring, scratching or deterioration . . . .” The policy does not further define deterioration.

While the word “deterioration” may have a broad dictionary definition, its meaning within the policy is informed by the words surrounding it. A canon of construction holding that the meaning of an unclear word or phrase, especially one in a list, should be determined by the words immediately surrounding it. Here, deterioration is accompanied by the words “wear and tear, aging, marring,” and “scratching.” Taken as a whole, this exclusion contemplates an impairment to property that occurs with normal and reasonable use over time. The damage identified as deterioration in this case is some sort of impairment caused by rainwater intrusion. The District Court found a question of fact exists as to whether that damage identified as deterioration is excluded under the policy.

CONCLUSION

Despite the Parties’ contentions regarding the ensuing loss provision, the result was whether the losses were excluded under the policy. The ensuing loss provision states as much.

The policy provides for coverage for any loss not otherwise excluded; thus, Encompass bears the burden of demonstrating the applicability of an exclusion. Encompass did so as to the defectively constructed components, as well as those components that must be necessarily replaced to fix the defective ones – effectively, everything except the damage identified as deterioration. Accordingly, the motion for summary judgment was granted as to those components. Summary judgment, however, was denied as to the damage Encompass identifies as deterioration.

ZALMA OPINION

Win some, lose some. This is now a case ripe for settlement since the court has granted summary judgment as to most of the costs of repair and left for trial a small part – deterioration and wear and tear – which should be easily resolved. The exclusions that were applied by the court were clear and unambiguous and the evidence from plaintiffs’ own witnesses were damning. If it goes to trial, the trial will be short and limited to the issue of what parts of the damage are due to deterioration.


© 2020 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

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