Ensuing Loss Coverage
Ensuing Loss Coverage
The term ensuing loss means a loss caused by a covered peril that occurs as a consequence of a loss caused by an excluded peril. That is, an excluded peril causes property damage, which triggers a covered peril that causes other property damage. Damage caused by the subsequent (insured) peril is covered.
An example of an ensuing loss is property damage caused by a fire that results from an earthquake. For instance, suppose an earthquake causes a gas main to rupture. The ruptured gas main triggers a fire that damages a building. The precipitating event was the earthquake, an excluded peril under a commercial property policy.
The earthquake caused property damage (the ruptured gas main), which triggered the fire that burned the building. The earthquake exclusion in a typical property policy contains an exception for ensuing loss caused by fire. Thus, the fire damage to the building is covered. Damage caused by the earthquake is excluded.
Most property policies apply on an all-risk basis. That is, they cover loss or damage caused by any peril that is not specifically excluded. The excluded perils are typically described in a section of the policy entitled Causes of Loss. The ensuing loss exceptions are located in this section.
In most commercial property policies, excluded perils are divided into two broad groups. The first group consists of the major perils like a flood, earth movement, and nuclear hazard. A single event caused by one of these perils can affect many policyholders. Thus, these perils are subject to anti-concurrent causation wording. This wording eliminates coverage for any loss caused by a listed peril, even if a second peril contributes to the loss, and that peril is covered.
The anti-concurrent causation language applies only to the first group of perils. All other excluded perils are exempt from this language. Both groups of excluded perils contain exceptions for ensuing loss.
Ensuing Loss Exceptions
A number of the exclusions found in a typical commercial property policy contain an exception for ensuing loss. Three examples are described below. These three exclusions appear in the standard ISO property policy. In the following scenarios, assume that the damaged property is insured under the ISO policy.
- Fungus: The fungus exclusion applies to the presence, growth, proliferation, spread or any activity of fungus, wet or dry rot or bacteria. (Mold is a type of fungus.) But if fungus, wet or dry rot or bacteria result in a specified cause of loss, the insurer will pay for the loss or damage caused by that specified cause of loss. The fungus exclusion provides an exception for ensuing loss caused by a specified cause of loss. The latter is a defined term that includes over a dozen separate perils. Examples are fire, lightning; windstorm and hail. Suppose that fungus damages a wall inside an insured building. The fungus also damages electrical wiring inside the wall. The damaged wiring triggers a fire that damages the building. Fire is a specified cause of loss. The damage to the building was caused by a fire that ensued from damage to a wire caused by fungus. Thus, the fire damage is covered. Damage to the building or its wiring caused by the fungus itself is not covered.
- Insects, Birds or Rodents: Many property policies exclude damage caused by nesting or infestation of insects, birds or rodents. Also excluded is damage caused by waste products or secretions produced by these animals. However, coverage is provided for damage by a specified cause of loss that results from insect, bird or rodent nesting, infestation, waste products or secretions. For example, pigeons take up residence on the roof of a machine shop. Their droppings accumulate and damage an air conditioning unit located on the roof. The damage causes the unit to leak, and water seeps into the building. The water causes damage to machinery in the shop. Water damage is a specified cause of loss. The water damage resulted from damage to the air conditioner caused by bird droppings. Thus, the damage to the machinery caused by water should be covered. The damage to the air conditioner is not covered because it was caused by an excluded peril (bird waste products).
- Mechanical Breakdown: Most commercial property policies exclude coverage for mechanical breakdown, including rupture or bursting caused by centrifugal force. But if mechanical breakdown results in elevator collision, the insurer will pay for the loss or damage caused by elevator collision. Suppose that a freight elevator in a building overheats and suffers a mechanical breakdown. The breakdown causes the elevator to fall from the second floor to the basement. Both the elevator and property contained in it are damaged by the collision. The damage to the elevator and its contents caused by the collision should be covered. Damage to the elevator caused by mechanical breakdown is excluded.