Michigan COA rules that Condo Association’s Insurance Policy may cover water damage resulting from construction defects
In Walters Beach Condominium Association v Home-Owners Insurance Company, unpublished opinion of the Court of Appeals, issued November 16, 2017 (Docket No. 335172), the Michigan Court of Appeals held that water damage caused by construction defects may be covered under a condominium association’s insurance policy. At issue was a rain storm caused water damage to 4 units in the Walters Breach Condominium. The storm occurred on August 30, 2013, and some of the unit owners witnessed water enter through various areas around their walkout basement doors, including around the light fixtures, the ceiling, and the door wall. The condominium association submitted a claim for the damage and the insurance company hired a structural and forensic engineering firm investigate the damage. The engineer determined that the water intrusion was the result of construction defects and the insurance carrier denied the claim based on the construction defects exclusion in the insurance policy. The trial court granted summary disposition in favor of the insurance carrier, but the Court of Appeals reversed.
On appeal, the parties agreed that: (1) the findings and opinions underlying the engineer’s report demonstrated that construction defects existed, (2) that the damage to the buildings was caused by construction defects in the brick veneer and by wind-driven rain that was able to penetrate the brick veneer, and (3) wind-driven rain is a covered loss under the insurance policy.
The language of the insurance policy provided in pertinent part:
We will pay for direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss.
* * *
- Covered Causes of Loss
RISKS OF DIRECT PHYSICAL LOSS unless the loss is:
- Excluded in Section B., Exclusions ….
At issue are two exclusions under Section B.2 and one exclusion under Section B.3 of the insurance policy:
We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.
* * *
- We will not pay for loss or damage caused by or resulting from any of the following:
* * *
- Maintenance Types of Loss:
(1) Wear and tear;
(2) Rust, corrosion, fungus, decay, deterioration, hidden or latent defect or any quality in property that causes it to damage or destroy itself.
* * *
- We will not pay for loss or damage caused by or resulting from any of the following. But if loss or damage by a Covered Cause of Loss results, we will pay for that resulting loss or damage.
* * *
- Negligent Work: Faulty, inadequate or defective:
* * *
(2) Design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction ….
The Court went on to analyze each of the exclusions as follows:
The condominium association successfully argued that Section B.3.c.(2) of the insurance policy includes a “resulting loss” clause that mandates limited coverage for damage caused by a covered loss. The court held that the pertinent provision states: “We will not pay for loss or damage caused by or resulting from any of the following. But if loss or damage by a Covered Cause of Loss results, we will pay for that resulting loss or damage.” The insurance carrier conceded that even though construction defects were a cause of the damage to the property, “there would arguably be coverage to repair the areas damaged as a result of a subsequent covered cause of loss.” The plain language of this provision requires that damage sustained due to a covered cause of loss, such as wind-driven rain, is covered under the policy even though the damage was also a result of a construction defect. What is not covered under Section B.3.c.(2) is the actual construction defect itself. While the insurance carrier was not responsible for costs associated with repairs to the brick exterior, including the weep holes, flashing, or any other aspect of the building that constitutes a construction defects, it was responsible for damage from wind-driven rain from the August 30, 2013 storm.
WEAR AND TEAR
The insurance carrier unsuccessfully argued that Section B.2.d.(1) of the policy excluded water damage if it was caused by “wear and tear.” The insurance policy did not define “wear and tear,” but the court used the common definition that provides: “the loss, injury, or stress to which something is subjected by or in the course of use; esp: normal depreciation.” Merriam-Webster’s Collegiate Dictionary, Eleventh Edition (2014). This phrase is also defined as “[d]eterioration caused by ordinary use” or “the depreciation of property resulting from its reasonable use.” Black’s Law Dictionary (10th ed). Given that the parties agreed that the damage was caused by initial construction defects and wind-driven rain that allowed water to damage the interior of the building, the court held that this could not constitute “wear and tear” that occurred over time.
HIDDEN OR LATENT DEFECTS
The court of appeals remanded the case to the trial court to determine whether the damage was excluded under Section B.2.d.(2) of the insurance policy and resulted from hidden defects. The insurance policy did not define a “hidden or latent defect,” but the court of appeals held that “hidden” is defined as “being out of sight or not readily apparent,” and “latent” is defined as “to lie hidden” or “present and capable of becoming though not now visible, obvious, active, or symptomatic.” Merriam-Webster’s Collegiate Dictionary, Eleventh Edition (2014). These terms modify “defect,” which is defined as “an imperfection that impairs worth or utility.” Id. The court held that inadequate flashing was possibly a hidden or latent defect because flashing is covered by exterior brick and likely could not be seen, after construction, without removing the exterior brick. The court held that expert report indicated that “[c]orrectly designed and constructed flashing systems include weep holes to allow any water that has penetrated the brick veneer to drain to the exterior of the veneer before it contacts the house framing or sheathing.” Given that the lack of weep holes in the brick wall was readily apparent the court held that a trier of fact could conclude that this defect not hidden.
Walters Beach Condominium Association v Home-Owners Insurance Company, unpublished opinion of the Court of Appeals, issued November 16, 2017 (Docket No. 335172) contains several important lessons for Michigan condominium associations. First, the fact that an insurance carrier may deny a condominium association’s insurance claim does not necessarily mean that the claim was legally denied. Insurance coverage will always be determined by the language of the insurance contract and a condominium association should consult with counsel to determine whether coverage was properly denied. Second, while faulty workmanship is rarely covered under an insurance policy, the language of the insurance policy may cover damage, such as water damage, that results from a construction defect.
Kevin Hirzel is the Managing Member of Hirzel Law, PLC and concentrates his practice on commercial litigation, community association law, condominium law, Fair Housing Act compliance, homeowners association and real estate law. Mr. Hirzel is a fellow in the College of Community Association Lawyers, a prestigious designation given to less than 175 attorneys in the country. He has been a Michigan Super Lawyer’s Rising Star in Real Estate Law from 2013-2018, an award given to only 2.5% of the attorneys in Michigan each year. Mr. Hirzel was named an Up & Coming Lawyer by Michigan Lawyer’s Weekly in 2015, an award given to only 30 attorneys in Michigan each year. He represents community associations, condominium associations, cooperatives, homeowners associations, property owners and property managers throughout Michigan. He may be reached at (248) 478-1800 or [email protected].