The subscriber did not believe the exclusion applied, even though the vendors work had not been performed properly and led to the damaged shirts.

In one corner, the majority of the editors were quick to respond that the loss was, in fact, not covered. Clearly, they reasoned, the process that produced the torn and streaked shirts was faulty workmanship and thus excluded from coverage.

In the other corner, one editor focused on the exception to the exclusion. He argued that the streaking and tearing of the shirts were losses that occurred separate from the workmanship of dying the shirts. His opponents, however, were unconvinced and could find no other cause of loss. There was no ensuing loss, they said, because the process could not be separated from the damage.

We usually strive to reach a unanimous answer to such questions. When we cant, we try to say more than, “Four out of five editors surveyed agree–your insured has no coverage.”

So, we offer an opinion by applying a mixture of logic, careful analysis of the policy, any sources (such as a dictionary) that might make things clearer, and, often, case law that addresses similar circumstances or policy language.

Because “faulty workmanship” is an undefined policy term, we turn to Websters for its plain, ordinary usage.

“Faulty” means “marked by fault or defect.”

“Workmanship” means “1) something effected, made, or produced, or 2) the quality imparted to a thing in the process of making.”

Putting the two definitions together, “faulty workmanship” essentially means flawed quality of the product that is worked on.

Many courts have also defined “faulty workmanship.” A Georgia court defined the term as “faulty or defective execution of making or doing something” in Kroll Construction Co. v. Great American Ins. Co., 594 F. Supp. 304 (N.D. Ga. 1984).

The 9th Circuit Court of Appeals identified at least two reasonable interpretations: “1) the flawed quality of a finished product, or 2) a flawed process,” in Allstate Ins. Co. v. Smith, 929 F.2d 447 (9th Cir. 1991).

As these definitions indicate, the faultiness of the workmanship intrinsically occurs in the making of the product or doing of the work.

In our subscribers scenario, it would be close to impossible to separate the damaged T-shirts from the process that rendered them torn and streaked.

As to the exception to the faulty workmanship exclusion that provides coverage, the commercial property policy states there is coverage for damage arising from covered causes of loss that result from specified excluded causes of loss. This wording describes an ensuing loss.

The court in Holden v. Connex-Metalna, 2000 U.S. Dist. LEXIS 18822 (Dec. 22, 2000), stated that ensuing losses must be separable events, and that “the damage and ensuing loss must be different in kind, not just degree.” The loss must occur subsequent to the excluded loss and “cannot be a manifestation or worsening of the original excluded loss.”

For the ensuing loss theory to apply to the T-shirt situation, the faulty process of dying the shirts must have triggered a resulting covered cause of loss and damage. For instance, if the dying machine that tore and streaked the shirts also malfunctioned and ignited a fire that destroyed the shirts, the lost shirts would be covered.

One court recently examined ensuing loss language as it applied to a toxic mold claim. In Cooper v. American Family Mutual Ins. Co., 184 F. Supp.2d 960 (D.C. Ariz. 2002), a homeowner asserted that the toxins released by mold spores were independent and separate losses resulting from the excluded peril of mold.

The court stated: “[I]f after removal of the mold, the mycotoxins continued to exist separate and apart from the mold, then the mycotoxins would be an independent and distinct ensuing loss.”

However, the toxins were produced by the mold, released by the mold, and would not be produced when the mold was removed. Thus, there was no separate and independent peril–just the mold. Likewise, the T-shirts suffered no separate peril. Their damage was caused by the faulty workmanship of the dying process.

The dissenting editor could argue that the shirts are covered, but his opposing editors have him on the ropes. Without identifying a separate, nonexcluded peril that had caused an ensuing loss, hes down for the count. Ding, ding!

Susan Massmann is a staff writer for the FC&S Bulletins, published by the National Underwriter Company in Erlanger, Ky. The FC&S editors welcome comment and questions and may be reached by fax at 859-692-2293 or via e-mail at [email protected].

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, July 8, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.