In March 2025 a US district court in Arkansas held that an exception to a property insurance exclusion known as the ‘ensuing loss’ clause, which restores coverage when an exclude event results in a covered peril causing damage, did not restore coverage for the complete replacement of a gym floor which had been defectively painted.
The policy covered “direct physical loss or damage unless the loss is limited or caused by a peril that is excluded”. The policy excluded “loss or damage caused by or resulting from inherent defects, errors or omissions in covered property (whether negligent or not) relating to … workmanship or construction”. The ensuing loss clause provided that “if a defect, error or omission as described above results in a covered peril, we do cover the loss or damage caused by that covered peril”.
A commercial flooring company installed a vinyl gym floor requiring painted volleyball and basketball lines at a school. The painting contractors painting work was faulty. The issues included crooked lines, incorrect markings, and smudges. The gym floor was rejected. Because the defective painting could not be removed from the vinyl flooring, the entire floor had to be removed and replaced and painted with new lines at a total cost of over USD181 000. It was not disputed that the basic exclusion applied because removing and replacing the gym floor was caused by faulty workmanship or construction, an excluded peril. It was undisputed that faulty workmanship was the sole and exclusive cause of loss which occurred the moment the paint was applied.
It was held that the policy provisions were not conflicting. The covered perils section provided coverage for direct physical loss unless an excluded peril caused that loss. The ensuing loss clause restores coverage only if an excluded peril results in a loss caused by a covered peril. The ensuing loss clause required a separate covered peril to ensue. The policy excluded coverage for the entire loss or damage to the gym floor resulting from the defective painting. The ensuing loss clause did not restore coverage because the claimant failed to identify a separate “covered peril”.