Policy Clauses, Exclusions and Endorsements: Language MattersThe Ninth Circuit Court of Appeals just reminded policyholders that while coverage exclusions are to be read narrowly, they must also be read comprehensively.

In Engineered Structures, Inc. v. Travelers Property Casualty Company of America, Engineered Structures, Inc. (ESI) obtained a builders’ risk insurance policy from Travelers Property Casualty Company of America (Travelers) to insure against the risk of loss during ESI’s construction of a fueling station. During construction, an underground fuel storage tank floated in a wet excavation hole before it could be installed completely. Travelers determined that ESI (or its subcontractors) caused the loss by not putting enough ballast water into the storage tank to prevent flotation during rain. Travelers denied coverage for the loss under the policy’s exclusion for loss due to “faulty, inadequate or defective . . . [d]esign, specifications, workmanship, repair, construction, renovation, remodeling, grading or compaction.” ESI sued Travelers and asserted claims, including breach of contract and bad faith.

The district court focused on the term “workmanship” in the exclusion and found the term ambiguous because it was not clear whether “workmanship” applied to losses caused by a flawed product (the storage tank itself) or to losses caused by a flawed process (the installation of the storage tank). Because the exclusion was ambiguous, the trial court construed it in favor of coverage and decided the exclusion only applied to flawed products and thus did not preclude coverage for loss caused by a flawed process in the tank installation. The trial court granted summary judgment in favor of ESI on the breach of contract claim but granted summary judgment in favor of Travelers on the bad faith claim. Both parties appealed.

On appeal, the Ninth Circuit reversed the district court’s grant of summary judgment in favor of ESI. The Ninth Circuit found the district court erred by focusing on the term “workmanship” and disregarding the term “construction,” which the court described as an unambiguous term that was used consistently throughout the policy to refer to the “‘process’ in completing the covered project.” The court also found that the district court “merely ‘assume[d] insufficient ballast was in the [storage tank] at the time of the loss’” and remanded for further proceedings to determine whether the loss was caused by “faulty, inadequate, or defective” construction.

In dicta, the Ninth Circuit also addressed a policy provision on “resulting loss or damage,” which provides: when an “excluded cause of loss . . . results in a Covered Cause of Loss,” Travelers “will pay for the resulting loss or damage caused by that Covered Cause of Loss.” ESI argued the provision means only the defect itself is excluded from coverage, but all other damages are covered. Travelers contended that no coverage was provided because all loss was caused by the faulty construction that allowed the tank to float in the excavated hole.

While acknowledging that interpretation of the clause would be decided by the district court, the Ninth Circuit opined that the positions argued by Travelers and ESI were “untenable.” The court rejected Traveler’s position because the provision did not contain an anti-concurrent causation clause, so the exclusion could not bar coverage for all of ESI’s loss where faulty construction was only one factor among several that caused the loss. The court further explained that ESI’s interpretation was flawed because it would require ignoring policy language that excludes coverage for “any cost incurred to tear down, tear out, repair or replace any part of any property to correct the fault, inadequacy or defect.”

While this Ninth Circuit ruling is unpublished and fairly narrow in its application to the interpretation of builders’ risk policies, its criticism of the district court opinion provides helpful guidance to policyholders (and their counsel) in construing insurance policies. First, policyholders should consider the meaning of every word in an insurance policy. Second, policyholders should consider how the interpretation of each of those words affects whether, or the extent to which a loss may be covered by a policy. Third, courts generally interpret each word in a policy within the context of the policy as a whole and may not find interpretations of terms in isolation persuasive. While applicable facts and law may vary, policyholders should be mindful of a particular jurisdiction’s approach to policy interpretation when developing a coverage claim.