No coverage for construction delay caused by broken tunnel machine
The Wash. Supreme Court decided that the policy's "machinery breakdown" exclusion precluded damages for a delay caused by a broken-down tunnel borer.
A Munich Re unit scored a victory against the Seattle Tunnel Partners (STP) and Washington Department of Transportation (WSDOT) when a unanimous Washington Supreme Court ruled that a two-year construction delay caused by a broken-down tunnel borer is not covered under STP’s insurance policy.
The STP began constructing a new tunnel in the summer of 2013 as part of an ongoing project to replace an existing viaduct. Six months later, the tunnel borer, affectionately called “Bertha,” quit working. Construction came to a complete halt and did not resume for a full two years. When the STP and WSDOT filed claims under the all-risks builder’s policy with Great Lakes Reinsurance, both claims were denied on the basis of the policy’s machinery breakdown exclusion. STP and WSDOT sued for wrongful denial, delay costs and loss of use; both the trial court and the state Court of Appeals affirmed the denial. In the suit that followed, the parties agreed on a key point: “Bertha” had suffered physical damage of the type described by the policy. They differed, however, on the other crucial question: Was the physical damage to the machine caused by a covered peril?
All-risk policies operate under a slightly different set of rules than named-peril policies. Under the latter, the loss itself must be caused by one of a specific list of perils, such as fire or theft; if not, there is no coverage. All-risk policies, on the other hand, hold that all perils are covered unless a peril is specifically excluded within the policy. This kind of policy requires a claimant to prove only that the damage caused is covered; then it becomes the insurer’s responsibility to prove that the peril was specifically excluded as a cause of damage.
In this case, the court stated that the parties all “appear[ed] to agree that the damage may have resulted from one or more of the following: design defects in the TBM, operator error and/or the encounter with a steel well casing.” In other words, the damage could have been caused, at least in part, by a design defect in the machine. The machine breakdown exclusion stated that the policy didn’t cover losses where the boring machine stopped working “by its own explosion mechanical or electrical breakdown, failure breakage or derangement.” When Great Lakes argued that all of the problems that had caused the breakdown were “internal” (i.e. inherent to the machine) and therefore excluded, STP and WSDOT cited N-Ren Corp. v. Am. Home Assur. Co., and Standard Structural Steel Co. v. Bethlehem Steel Corp. for their contention that design defects were “external” (i.e. not totally inherent to the machine), meaning the loss would be covered.
The test formulated in the N-Ren decision was based on a judge who concluded that “external causes” meant to exclude coverage for three specific types of losses: operator negligence, wear and tear and deterioration. STP argued that the N-Ren court had stated that design defects did not fit in any of the intended exclusions, but the Washington Supreme Court came back and said the categorization, in that case, was highly unusual and did not fit the facts before them. The Standard Structural Steel case was similarly unconvincing, as the decision was particular to the facts of that case and had concluded that an “external cause” of loss only meant an internal flaw was not entirely responsible for the physical damages.
STP also tried to argue that any internal defects were inherently caused by the engineers who put the machine together; the argument did not succeed. The delay costs and loss of use were not covered because the policy did not cover nonphysical losses.
The Washington Supreme Court affirmed the denial of coverage.
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