Seattle Tunnel Partners v. Great Lakes Reinsurance (UK) PLC

• Court: Washington Supreme Court
• Decided: September 15, 2022
• Docket: 100,168-1
• Status: Published

Opinion

NOTICE: SLIP OPINION (not the court’s final written decision)

The opinion that begins on the next page is a slip opinion. Slip opinions are the written opinions that are originally filed by the court. A slip opinion is not necessarily the court’s final written decision. Slip opinions can be changed by subsequent court orders. For example, a court may issue an order making substantive changes to a slip opinion or publishing for precedential purposes a previously “unpublished” opinion. Additionally, nonsubstantive edits (for style, grammar, citation, format, punctuation, etc.) are made before the opinions that have precedential value are published in the official reports of court decisions: the Washington Reports 2d and the Washington Appellate Reports. An opinion in the official reports replaces the slip opinion as the official opinion of the court. The slip opinion that begins on the next page is for a published opinion, and it has since been revised for publication in the printed official reports. The official text of the court’s opinion is found in the advance sheets and the bound volumes of the official reports. Also, an electronic version (intended to mirror the language found in the official reports) of the revised opinion can be found, free of charge, at this website: https://www.lexisnexis.com/clients/wareports. For more information about precedential (published) opinions, nonprecedential (unpublished) opinions, slip opinions, and the official reports, see https://www.courts.wa.gov/opinions and the information that is linked there. For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. FILE THIS OPINION WAS FILED FOR RECORD AT 8 A.M. ON IN CLERK’S OFFICE SEPTEMBER 15, 2022 SUPREME COURT, STATE OF WASHINGTON SEPTEMBER 15, 2022 ERIN L. LENNON SUPREME COURT CLERK

IN THE SUPREME COURT OF THE STATE OF WASHINGTON

SEATTLE TUNNEL PARTNERS, a Washington ) joint venture; and WASHINGTON STATE ) DEPARTMENT OF TRANSPORTATION, ) No. 100168-1 ) Petitioners, ) ) HITACHI ZOSEN U.S.A. LTD., ) ) Intervenor-Petitioner, ) En Banc ) v. ) ) GREAT LAKES REINSURANCE (UK) PLC, a ) Filed: September 15, 2022 foreign insurance company; ZURICH ) AMERICAN INSURANCE PLC, a New York ) insurance company; STARR SURPLUS LINES ) INSURANCE COMPANY, an Illinois insurance ) company; INDIAN HARBOR INSURANCE ) COMPANY, a Connecticut insurance company; ) ALLIANZ GLOBAL CORPORATE & ) SPECIALTY SE, a foreign insurance company; ) TORUS INSURANCE (UK) LIMITED, a ) foreign insurance company; PARTNERRE ) IRELAND INSURANCE LIMITED, a foreign ) insurance company; DOES 1-100, individual ) and/or corporate members of SYNDICATE 382 ) at LLOYD’S, LONDON; and DOES 101-200, ) individual and/or corporate members of ) SYNDICATE 1882 at LLOYD’S, LONDON, ) ) Respondents. ) ) For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

JOHNSON, J.—This consolidated case concerns the interpretation of a

builder’s “all-risk” insurance policy. Petitioners—Washington State Department of

Transportation (WSDOT) and Seattle Tunnel Partners (STP)—seek reversal of a

published Court of Appeals decision affirming the partial summary judgment

rulings that the insurance policy does not provide coverage for certain losses. At

issue in WSDOT’s petition for review is whether the loss of use or functionality of

the insured property constitutes “physical loss” or “physical damage” that triggers

coverage. STP’s petition asks whether the insurance policy excludes coverage for

damage to the insured property caused by alleged design defects and whether the

policy covers delay losses. Intervenor-petitioner Hitachi Zosen U.S.A. Ltd. joins in

STP’s petition for review but not in WSDOT’s petition and joins only in the issue

concerning the exclusion for alleged design defects.1

This case arises out of a major construction project to replace the Alaskan

Way Viaduct in Seattle. In 2011, STP contracted with WSDOT to construct a

tunnel to replace the viaduct. As part of the agreement, STP obtained a builder’s

all-risk insurance policy (Policy) from Great Lakes Reinsurance (UK) PLC and

several other underwriters2 (collectively Great Lakes). The Policy named STP and

1 Hitachi joined the action as an intervenor-plaintiff. Hitachi designed and manufactured the tunnel boring machine. 2 Great Lakes Reinsurance is joined by the following insurance underwriters: Allianz Global Corporate and Specialty SE, PartnerRe Ireland Insurance Limited, Indian Harbor Insurance Company, Zurich American Insurance Company, Torus Insurance (UK) Limited, Syndicate 382 at Lloyd’s of London, Syndicate 1882 at Lloyd’s of London, and Starr Surplus

2 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

WSDOT as insureds. This Policy insured against damage to both the tunneling

works and the tunnel boring machine (TBM). “Section 1” of the Policy concerned

the tunneling works and “Section 2” concerned the TBM. The tunneling works

refer to “the tunnel itself during the course of construction, and property being

used or intended for use in the construction of the tunnel (except the TBM).”

Clerk’s Papers (CP) at 4695.

The TBM began operating in July 2013. In December 2013, after excavating

part of the tunnel, the machine stopped working. The TBM did not resume mining

until December 2015. The project was unable to continue during the two-year

period while the TBM was disassembled, removed, and repaired. STP and

WSDOT tendered insurance claims under the Policy. Great Lakes denied coverage,

and STP and WSDOT sued the insurers, alleging wrongful denial of their claims.

The parties filed a series of cross motions for partial summary judgment.

The motions raised various issues relating to the interpretation of the Policy. The

trial court granted Great Lakes’ motions and denied petitioners’ motions. Relevant

to this case, the trial court ruled, as a matter of law, that (1) the “Machinery

Breakdown Exclusion” (MBE) in Section 2 “excludes coverage for property

damage to the TBM caused by any alleged design defects,” (2) the Policy does not

Lines Insurance Company. Vulcan LLC and United Policyholders filed amici briefs in support of petitioners.

3 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

afford coverage for losses due to project delays, and (3) the loss of use or

functionality of the tunnel does not constitute “‘direct physical loss, damage, or

destruction’” that is covered by the Policy. CP at 2516, 8911. After granting

discretionary review, the Court of Appeals affirmed these partial summary

judgment rulings. We affirm the Court of Appeals.

ANALYSIS

I. Standard of Review

“‘This court reviews summary judgment determinations de novo, engaging

in the same inquiry as the trial court. Summary judgment is proper where there are

no genuine issues of material fact and the moving party is entitled to judgment as a

matter of law.’” Kut Suen Lui v. Essex Ins. Co., 185 Wn.2d 703, 709-10, 375 P.3d

596 (2016) (citation omitted) (quoting Durland v. San Juan County, 182 Wn.2d 55,

69, 340 P.3d 191 (2014)). Washington courts interpret language in insurance

policies as a matter of law, and this court reviews de novo a lower court’s

interpretation of policy language. Kut Suen Lui, 185 Wn.2d at 710.

The issues presented in this case require us to interpret language in the

Policy to determine whether, as a matter of law, the alleged specified loss is

covered. Specifically, we are asked to determine (1) whether a design defect is an

internal cause of damage that falls within the MBE, (2) whether the Policy’s basis

4 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

of indemnity provision covers losses due to project delays, and (3) whether

physical loss or damage includes loss of use or functionality.

Petitioners do not challenge the rules we apply when interpreting insurance

contracts. They challenge the Court of Appeals’ application of those rules and the

outcome. Rules for interpreting insurance contracts are well settled. We construe

insurance policies as a whole and give the language “‘a fair, reasonable, and

sensible construction as would be given to the contract by the average person

purchasing insurance.’” Queen Anne Park Homeowners Ass’n v. State Farm Fire

& Cas. Co., 183 Wn.2d 485, 489, 352 P.3d 790 (2015) (internal quotation marks

omitted) (quoting Queen City Farms, Inc. v. Cent. Nat’l Ins. Co. of Omaha, 126

Wn.2d 50, 65, 882 P.2d 703, 891 P.2d 718 (1994)). Where a term is not defined in

the policy, it is assigned its “‘plain, ordinary, and popular meaning.’” Queen Anne

Park, 183 Wn.2d at 491 (quoting Queen City Farms, 126 Wn.2d at 77).

“‘[I]f the policy language is clear and unambiguous, we must enforce it as

written; we may not modify it or create ambiguity where none exists.’” Kut Suen

Lui, 185 Wn.2d at 712 (alteration in original) (quoting Quadrant Corp. v. Am.

States Ins. Co., 154 Wn.2d 165, 171, 110 P.3d 733 (2005)). If the language is

ambiguous, we take additional steps in our interpretation analysis. Language in an

insurance contract is ambiguous if, on its face, it is fairly susceptible to two

different but reasonable interpretations. Kut Suen Lui, 185 Wn.2d at 712.

5 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

II. Machinery Breakdown Exclusion

STP first challenges the Court of Appeals holding that design defects fall

within the MBE. The Policy at issue is a builder’s “all-risk” policy. In an all-risk

policy, the applicable rule is “‘any peril that is not specifically excluded in the

policy is an insured peril.’” Vision One, LLC v. Phila. Indem. Ins. Co., 174 Wn.2d

501, 513, 276 P.3d 300 (2012) (some emphasis omitted) (quoting Findlay v.

United Pac. Ins. Co., 129 Wn.2d 368, 378, 917 P.2d 116 (1996)). Once the insured

shows the loss falls within the scope of the policy’s coverage, the burden shifts to

the insurer to show “the loss is excluded by specific policy language” in order to

avoid coverage. McDonald v. State Farm Fire & Cas. Co., 119 Wn.2d 724, 731,

837 P.2d 1000 (1992).

Here, the Policy’s insuring clause provided that the insurers would cover

“direct physical loss, damage or destruction (hereinafter referred to as ‘Damage’)

not specifically excluded herein . . . to the Interest Insured.” CP at 135. It is

undisputed that the TBM (the insured interest) suffered “physical loss, damage or

destruction.” The question is whether one of the alleged causes of that damage falls

within the Policy’s MBE.

The cause (or causes) of damage to the TBM is disputed between the parties.

All parties appear 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

6 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

a steel well casing. The cause of the damage remains a question of fact left to be

resolved by a fact finder. The question before this court is whether, as a matter of

law, the MBE excludes coverage for damage to the TBM caused by the TBM’s

alleged design defects.

Great Lakes investigated and determined that the “TBM sustained a

machinery breakdown due to the fact that it was improperly designed, under

dimensioned, and had an inadequate lubrication system. Overall, the TBM was not

fit for the specified purpose.” CP at 2901. “Stated differently, the ‘under

dimensioned’ design and the lubrication system caused the TBM to operate

improperly and/or cease operating.” CP at 2901. STP understood this to mean that

Great Lakes concluded the cause of the damage to the TBM was the TBM’s own

defective design. Based on this conclusion, Great Lakes denied coverage.

In its suit against Great Lakes, STP filed a summary judgment motion,

arguing that Section 2 of the Policy did not exclude coverage for damage caused

by alleged design defects. Great Lakes filed a cross motion. The trial court denied

STP’s motion and granted Great Lakes’ cross motion. It ruled, “as a matter of

law,” that the MBE “excludes coverage for property damage to the TBM caused by

any alleged design defects.” CP at 2516. The Court of Appeals affirmed, reasoning

that the MBE excludes losses due to internal causes of damage, and a design defect

constitutes an internal cause of damage.

7 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

The parties disagree over whether a design defect constitutes an internal

cause of damage. Looking at the Policy language, undefined terms in an insurance

policy are given their plain, ordinary, and popular meaning in accord with the

understanding of the average purchaser of insurance. We will often turn to the

dictionary definition of an undefined term to determine its meaning.

Section 2 of the Policy, which concerns the TBM, includes the MBE

exclusion. The MBE reads, “[The insurers] will not indemnify the Insured [for] . . .

[l]oss of or [d]amage in respect any item by its own explosion mechanical or

electrical breakdown, failure breakage or derangement.” CP at 3696, 3865. STP

highlights that the exclusion is “missing words and punctuation” and opine that it

is “garbled.” STP’s Suppl. Br. at 2, 20. STP does not make a specific ambiguity

argument. It argues that “the very most Insurers can establish is the machinery

breakdown exclusion . . . is arguably ambiguous.” STP’s Suppl. Br. at 19

(emphasis omitted). STP does not explain how any missing word or punctuation

makes the MBE fairly susceptible to two different but reasonable interpretations.

The Court of Appeals, in analyzing this provision, concluded that “any item”

means the component parts of the TBM. After reviewing dictionary definitions of

“any” and “item,” the court concluded these definitions “imply numerosity and

unambiguously indicate that the section 2 MBE excludes coverage for breakdown

of a single part of the TBM, not the entire TBM.” Seattle Tunnel Partners v. Great

8 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

Lakes Reinsurance (UK), PLC, 18 Wn. App. 2d 600, 612, 492 P.3d 843 (2021),

review granted, 198 Wn.2d 1032 (2022) (STP). STP does not seem to challenge

this interpretation of “any item.” The Court of Appeals noted that “[t]his issue is

consequential with respect to the MBE’s ‘resultant [d]amage’ clause. . . . [I]f ‘any

item’ means a part of the TBM, then the MBE would not exclude damage to the

TBM caused by a defective part.” STP, 18 Wn. App. 2d at 610 n.6 (second

alteration in original). 3

The phrase “by its own” is also not disputed. The Court of Appeals

concluded that “by its own” indicates the MBE excludes coverage for internal

causes of damage. That is to say, the MBE would not exclude coverage for a

machinery breakdown caused by an “external” peril. Both Great Lakes4 and STP

agree that the MBE excludes coverage for internal causes of damage. Opening Br.

of Pet’r STP at 16 (Wash. Ct. App. No. 78691-1-I (2019)) (“By adding [the

limiting phrase “by its own”], the Insurers limited the machinery breakdown

exclusion to internal—as opposed to external—causes.”). The Court of Appeals

supports this conclusion by citing to cases from other states. See Connie’s Constr.

Co. v. Cont’l W. Ins. Co., 227 N.W.2d 204, 207 (Iowa 1975) (holding that a

3 Great Lakes did not appeal this ruling. 4 According to Great Lakes, “[i]t is undisputed that the policy would respond to damage to the TBM due to an external peril such as a collapse, fire, flood, or earthquake, because such perils—which are precisely what the parties intended the policy to insure against—would clearly not involve the TBM’s ‘own . . . mechanical or electrical breakdown.’” Resp’ts’ Resp. to Amicus Curiae Mem. at 24 (second alteration in original).

9 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

mechanical breakdown is a functional defect in machinery and that an MBE did

not exclude coverage because in that case the breakdown of a crane was caused by

user error); Caldwell v. Transp. Ins. Co., 234 Va. 639, 644, 364 S.E.2d 1 (1988)

(holding that an MBE “is restricted to losses arising from internal or inherent

deficiency or defect, rather than from any external cause”); James W. Fowler Co.

v. QBE Ins. Corp., 474 F. Supp. 3d 1149, 1160-61 (D. Or. 2020) (adopting

Caldwell’s reasoning to interpret a similar MBE), rev’d, 2021 WL 4922552

(mem.).

STP does not appear to challenge the Court of Appeals’ conclusion that “by

its own” means the MBE is limited to internal causes of damage, and we agree.

The term “by its own” is undefined in the Policy and is assigned its plain and

ordinary meaning by looking to the dictionary definition of the words. In this

context, the word “by” is used as a preposition and means “in consequence of” or

“as a result of.” WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY 307 (2003).

“Its,” a possessive noun, is defined as “belonging to it,” “itself as possessor,”

“inherent in it,” or “associated or connected with it.” WEBSTER’S, supra, at 1204.

Finally, the adjective “own” is defined as “belonging to oneself or itself.”

WEBSTER’S, supra, at 1612. Applying these definitions, “by its own” refers to

something that is internal, inherent, or belonging to the TBM. Therefore, consistent

with the plain, ordinary meaning of the phrase “by its own,” we agree with the

10 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

Court of Appeals that the MBE excludes from coverage inherent or internal causes

of damage.

The dispute between the parties then is whether the TBM’s alleged design

defect constitutes an “internal” or “external” cause of damage. The Court of

Appeals concluded that a design defect is an internal cause because “design defects

are inherent to the insured subject matter. . . . [and] a product’s design is something

inherent to it and inseparable from it.” STP, 18 Wn. App. 2d at 614, 616. The court

applied the reasoning from out-of-state cases GTE Corp. v. Allendale Mutual

Insurance Co., 372 F.3d 598 (3d Cir. 2004), and Acme Galvanizing Co. v.

Fireman’s Fund Insurance Co., 221 Cal. App. 3d 170, 270 Cal. Rptr. 405 (1990),

opining that they “offer a convincing rationale as to why we should view a design

defect as an internal cause of damage.” 5 STP, 18 Wn. App. 2d at 616.

Looking at the cases, in GTE the insured sued its all-risk insurers, seeking to

recover the costs it incurred in remediating its computer system to avoid “Y2K”

(the year 2000) date-recognition problems. In essence, the program was unable to

properly read dates on or after the year 2000. The computer system’s “Y2K

5 STP generally takes issue with the Court of Appeals reliance on select decisions from other jurisdictions and argues that the court did not adequately consider the two out-of-state cases the petitioners cited in their briefing: N-Ren Corp. v. American Home Assurance Co., 619 F.2d 784 (8th Cir. 1980), and Standard Structural Steel Co. v. Bethlehem Steel Corp., 597 F. Supp. 164 (D. Conn. 1984). To decipher the meaning of the policy language, Washington courts apply well-settled rules of insurance policy interpretation. But opinions from other jurisdictions are also instructive.

11 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

problem” was the cause of the loss the insureds incurred, and the issue was

whether that specific cause of loss fell within the insurance policy’s defective

design exclusion. The court concluded the Y2K threat was a design defect because

there was an “‘imperfection or shortcoming’ . . . in the system’s design or

specification.” GTE, 372 F.3d at 610 (quoting BLACK’S LAW DICTIONARY 429 (7th

ed. 1999)). In explaining that the loss was caused by a design defect, the court

reasoned that the cause of the loss was not “some external threat.” GTE, 372 F.3d

at 609. Rather, “the system performed in exactly the manner it was designed to

operate” and was inadequate. GTE, 372 F.3d at 609. The insured argued the Y2K

threat was an external threat that could not be considered a design defect. The court

rejected that argument, explaining:

We disagree with the suggestion that the Y2K threat is “external” merely because GTE’s systems interacted with other systems or read data from outside sources. Such a conception of external would essentially allow all defective designs and inherent vices to be characterized as external problems. For example, if a car is defectively designed so that the tires come off when the car is driven at 10 miles per hour, the threat is not external merely because the “external” event of the road contacting the tire caused the tires to fly off. The road contacting the tire is an entirely predictable event that is inherent to the very function and purpose of the automobile— there is no problem independent of the automotive design. To take another example, if a dam whose very purpose is to hold water falls apart when the water rises to an entirely predictable level, the rising of the water is not an “external” problem—the problem is that the dam was not properly designed to allow it to perform precisely the function it was intended to perform, the holding of water.

12 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

GTE, 372 F.3d at 612. The Court of Appeals below found the Third Circuit Court

of Appeals’ reasoning persuasive in support of its ruling that a design defect is

internal.

The Court of Appeals below also considered Acme. In that case the court

interpreted an express “latent defect/inherent vice” exclusion to determine the

meaning of “latent.” Acme, 221 Cal. App. 3d 170. The California court concluded

that a defect in design is a latent defect. Here, the Court of Appeals reasoned that

Acme’s analysis was relevant because “latent defect,” “inherent defect,” and

“internal cause” have been used interchangeably. STP, 18 Wn. App. 2d at 616

n.12. Applying the reasoning of these two cases, the Court of Appeals ruled a

design defect is internal. STP challenges this ruling and cites to N-Ren and

Standard Structural Steel to support its position that a design defect is an external

cause of damage. N-Ren Corp. v. Am. Home Assur. Co., 619 F.2d 784 (8th Cir.

1980); Standard Structural Steel Co. v. Bethlehem Steel Corp., 597 F. Supp. 164

(D. Conn. 1984).

In contrast, in N-Ren the Eighth Circuit Court of Appeals concluded that a

design error is an external cause. The court in N-Ren applied the “Pollack test” to

conclude that the design errors in that case “must be considered external causes of

the loss to the insured.” 619 F.2d at 788. The court derived the “Pollack test” from

Contractors Realty Co. v. Insurance Co. of North America, 469 F. Supp. 1287

13 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

(S.D.N.Y. 1979), where Judge Pollack listed three types of losses that are not

covered under an insurance policy that only covered external causes of loss. The

court explained that a loss that results from a design error did not “clearly . . . fit”

within any of the three types of losses identified in the “Pollack test.” N-Ren, 619

F.2d at 788.

The Court of Appeals here found N-Ren to be unpersuasive, noting that this

case is not instructive because the conception of a product’s design is inherent to

the product itself and the categorization of losses under the Pollack test was an

outlier. Here, we do not have a similar categorization of loss nor are the petitioners

suggesting we adopt such a categorization or analysis.

In Standard Structural Steel, the Connecticut court concluded that the design

defect was an external cause of damage under the particular facts of the case. The

“design defect” at issue there was the insured’s “negligence in constructing the

cable guides contrary to the engineering specifications and blueprints.” Standard

Structural Steel, 597 F. Supp. at 194. The court noted that had the property been

constructed “as the plans called for, no accident and resulting damage would have

occurred.” Standard Structural Steel, 597 F. Supp. at 194. In other words, “[t]he

causative agent of damage resulting from this design defect did not emanate from

an inherent vice within the property itself . . . . It came from negligently failing to

follow the engineering specifications.” Standard Structural Steel, 597 F. Supp. at

14 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

195. In explaining what constitutes an “external” cause, the court highlighted what

it is not: “A cause is external if damage which arises from it does not result wholly

‘from an inherent defect in the subject matter or from the inherent deficient

qualities, nature and properties of the subject matter.’” Standard Structural Steel,

597 F. Supp. at 193 (quoting Compagnie des Bauxites de Guinee v. Ins. Co. of N.

Am., 566 F. Supp. 258, 261 (W.D. Pa. 1983)). The Court of Appeals below found

this reasoning to be consistent with its own conclusion that a design defect is

something inherent to the TBM and therefore is an internal cause of harm. STP, 18

Wn. App. 2d at 616 n.13.

Applying the rules of insurance policy interpretation, we hold that a design

defect is internal to the insured property, and we agree with the out-of-state cases

that are consistent with this conclusion. The phrase “design defect” does not appear

in the MBE, but we may still rely on our contract interpretation framework to aid

in determining whether a “design defect” constitutes an internal cause of damage.

Turning to the dictionary definitions, to “design” is to plan or “devise or propose

for a specific function.” WEBSTER’S, supra, at 611. A “defect” is the “absence of

something necessary for completeness, perfection, or adequacy in form or

function.” WEBSTER’S, supra, at 591. To be “defective” means to “fall[] below an

accepted standard . . . in adequacy of function.” WEBSTER’S, supra, at 591. And

“defectibility” is defined as an “inherent defectiveness.” WEBSTER’S, supra, at 591.

15 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

The ordinary, plain meaning of the phrase indicates that a design defect is internal

to the insured property.

When interpreting an insurance policy, we give it a “practical and reasonable

interpretation rather than a strained or forced construction that leads to an absurd

conclusion, or that renders the policy nonsensical or ineffective.” Transcon. Ins.

Co. v. Wash. Pub. Utils. Dists.’ Util. Sys., 111 Wn.2d 452, 457, 760 P.2d 337

(1988). While exclusions should be strictly construed against the insurer, a strict

application should not contradict the plain, clear language such that a strained or

forced construction results. Kut Suen Lui, 185 Wn.2d at 712.

STP argues we should conclude that a design defect is an external cause of

damage. STP explains that “while the manifestation of a design defect may be

internal to the TBM, any such defect would have been caused by an engineer,

architect, or other such designer at a distant location months or years prior to

construction.” STP’s Suppl. Br. at 19. By way of this argument, STP attempts to

draw our attention to what it calls the “precipitating event” that caused the design

defect rather than focus on the design defect itself as the cause of the machinery

breakdown. STP’s Suppl. Br. at 19. We reject this argument as inconsistent with

established principles of insurance policy interpretation.

STP’s interpretation of design defect would recharacterize the cause of the

TBM’s damage by pointing to some distant but-for cause as the true source. We

16 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

rejected this type of reasoning in Vision One while discussing an insurance

policy’s resulting loss clause. In that case, the focus was on subsequent events as a

but-for cause of damage, whereas here the petitioners point to “precipitating”

events that led to the existence of the design defect. In Vision One, we noted:

“As an ‘all-risk’ policy, this insurance policy basically covers everything unless specifically excluded. That means the number of possibilities for last-in-time ‘but for’ causes of damage are limited only by the imagination of the reader. . . . What if faulty construction allows humid summer air to enter the building, which rusts metal fixtures? But for the exposure to the summer air, no damage to the fixtures would have occurred. Yet the contract does not exclude damages caused by ‘air.’ Coverage? What if a poorly constructed ceiling beam falls, smashing the floor below? But for the force of gravity, no damage to the floor would have occurred. Yet the contract does not exclude damages caused by ‘gravity.’ Coverage?”

174 Wn.2d at 516 (alteration in original) (quoting TMW Enters., Inc. v. Fed. Ins.

Co., 619 F.3d 574, 576-77 (6th Cir. 2010)).

STP’s interpretation raises similar concerns. The MBE excludes internal

causes of machinery breakdown. The plain, ordinary, and popular meaning of the

term “design defect” can be understood as an inadequacy in function that is

inherent to or part of the product itself. The assertion—that a design defect is an

external cause because but for the engineer who developed the defective design,

the TBM would not have suffered damage—is unconvincing. It would be an

unreasonable interpretation to conclude that an internal cause of damage “that is

17 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

clearly an excluded risk under the policy was meant to become compensable

because in a philosophical sense it can also be classified”6 as an external cause. In

sum, we conclude a design defect constitutes an internal cause of damage

consistent under the ordinary meaning of the terms at issue here.

STP further argues that Section 2 of the Policy must provide coverage for

damage caused by design defects because it does not contain an explicit “design

defects” exclusion. To support its argument that any design defect exclusion must

be explicit, STP argues that under Washington law, exclusions in an all-risk policy

must be specific, clear, and unequivocal, citing International Marine Underwriters

v. ABCD Marine, LLC, 179 Wn.2d 274, 288, 313 P.3d 395 (2013) (plurality

opinion) (“if insurers want exclusions upheld, they have the burden of drafting

them in ‘clear’ and ‘unequivocal’ terms.”); Vision One, 174 Wn.2d at 513 (stating

an all-risk policy provides coverage for perils unless the peril is specifically

excluded); Moeller v. Farmers Ins. Co. of Wash., 173 Wn.2d 264, 272, 267 P.3d

998 (2011) (stating exclusions will not be extended beyond their “clear” and

“unequivocal” meaning); STP’s Suppl. Br. at 8-9.

Respondent Great Lakes counters that the MBE unequivocally excludes

coverage for a specific type of damage to the TBM—machinery breakdowns

resulting from any internal cause—so an explicit design defect exclusion in Section

6 TMW, 619 F.3d at 577.

18 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

2 would be redundant. Great Lakes also contends that it is not required to identify

every internal cause of damage that may result in a machinery breakdown for the

exclusion to apply. It argues that to conclude otherwise would render the MBE

provision in this Policy wholly ineffective because it does not list any specific

internal causes, and when interpreting an insurance provision, we avoid giving it a

strained construction that renders the policy ineffective. We are persuaded by

Great Lakes’ arguments and agree with its reasoning.

STP also highlights that Section 1 of the Policy contains an explicit design

defects exclusion, which is significant because “differences in policy wording

indicate differences in intended meaning.” STP’s Suppl. Br. at 10 (citing Dickson

v. U.S. Fid. & Guar. Co., 77 Wn.2d 785, 789, 466 P.2d 515 (1970) (noting that

changing language in particular policy from language used in other exclusionary

clauses “manifested an obvious intent” that the clause not be read the same as the

other clauses)). Section 1 contains an exclusion for “[d]efects of material

workmanship design plan,” which provides that Great Lakes will not cover “costs

rendered necessary by defects of material workmanship design plan or

specification.” CP at 172. Great Lakes points out that Section 1 and Section 2 of

the Policy cover distinct types of property that require different types of

exclusions. Section 1 covers the tunnel itself; the temporary and permanent

structures; and the materials, supplies, equipment, and other goods used in the

19 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

execution of the construction project (excluding the TBM). Section 2 covers the

tunnel boring machine. Great Lakes notes that in context, the defects exclusion is

necessary for the construction-related portion of the project and an MBE would not

be applicable. Further, an explicit design defects exclusion in Section 2 was

unnecessary because the language of the MBE excludes coverage for machinery

breakdowns resulting from an internal cause, which would include the machine’s

defective design.

We agree with the reasoning of the Court of Appeals and hold that the MBE

as written excludes coverage for machinery breakdowns resulting from an internal

cause, which includes a defective design.

Finally, STP argues the Court of Appeals erred by not finding coverage

applying the efficient proximate cause rule. Under Washington law, the rule of

efficient proximate cause provides coverage “‘where a covered peril sets in motion

a causal chain[,] the last link of which is an uncovered peril.’” Zhaoyun Xia v.

ProBuilders Specialty Ins. Co., 188 Wn.2d 171, 182-83, 400 P.3d 1234 (2017)

(alteration in original) (quoting Key Tronic Corp. v. Aetna (CIGNA) Fire

Underwriters Ins. Co., 124 Wn.2d 618, 625, 881 P.2d 201 (1994)). “‘“If the initial

event . . . is a covered peril, then there is coverage under the policy regardless [of]

whether subsequent events within the chain, which may be causes-in-fact of the

loss, are excluded by the policy.”’” Xia, 188 Wn.2d at 183 (quoting Key Tronic

20 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

Corp., 124 Wn.2d at 625-26 (quoting Safeco Ins. Co. of Am. v. Hirschmann, 112

Wn.2d 621, 628, 773 P.2d 413 (1989))). This would first require a finding that the

Policy covers damage for design defects and that those design defects caused the

damage to the TBM. Under those circumstances, the efficient proximate cause rule

might provide coverage for the last link in the causal chain, even if it is an

excluded peril (i.e., the machinery breakdown). However, this doctrine does not

apply where the initial event is an uncovered peril. We agree with the Court of

Appeals that the efficient proximate cause doctrine does not apply because the

initial event—the design defect—is an uncovered peril under the MBE.

III. Project Delay Losses

STP separately challenges the Court of Appeals ruling that the Policy does

not cover losses “due to project delays.” CP at 8911. The Court of Appeals

concluded the language of the Policy’s insuring clause limits coverage to direct

physical losses and therefore does not provide coverage for nonphysical losses,

such as delay costs.

STP first argues that the Policy must provide coverage for project delays

because it does not specifically exclude such coverage. This argument assumes the

Policy covers delay losses in the first instance. Before discussing any potential

exclusion, the insured needs to show that the loss falls within the scope of the

Policy’s coverage.

21 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

The Policy’s insuring clause provides that “[t]he Insurers will indemnify the

Insured in respect of direct physical loss, damage or destruction . . . not specifically

excluded herein . . . to the Interest Insured.” CP at 135. Here, the Interest Insured is

the TBM. It is undisputed that the TBM suffered direct physical loss. Petitioners

state that “but for” the direct physical damage to the TBM, “none of the losses at

issue would have been incurred.” STP’s Suppl. Br. at 24. Therefore, under STP’s

view, the Policy must cover all of the claimed losses, including losses due to

project delays, because they incurred those losses only as a result of the physical

loss. We disagree.

We rejected a similar argument in Vision One. In Vision One, the all-risk

insurance policy “covered ‘direct physical “loss” to Covered Property’ caused by a

covered peril.” 174 Wn.2d at 522. The Policy at issue here covers “‘direct physical

loss, damage, or destruction’” to the insured property caused by a covered peril.

CP at 8911. Under both all-risk policies, coverage is triggered when the insured

property suffers a direct physical loss caused by any peril not specifically

excluded. Here, coverage was triggered when the TBM suffered direct physical

loss. Similarly, in Vision One, coverage was triggered when a newly poured

concrete floor crashed down onto the lower level, resulting in “direct physical loss”

to the insured property. Similar to STP’s claim here, the insured in Vision One

sought coverage for costs associated with the cleanup, repair, and reconstruction of

22 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

the collapsed concrete floor, including delay losses suffered as a direct result of the

collapse. In considering whether the policy covered these delay losses, we

explained that the policy’s general grant of coverage “extended only to ‘physical’

losses to covered ‘property.’” Vision One, 174 Wn.2d at 523. We highlighted that

the delay-related financial losses at issue were neither physical losses nor losses to

covered property. Just like here, in Vision One it was true that “but for” the direct

physical damage to the building, the delay losses would not have been incurred.

Nevertheless, we rejected the insured’s argument and concluded the policy did not

provide coverage for the delay-related financial losses. Vision One, 174 Wn.2d at

522-23. Applying that same analysis to the policy here, we hold that the Policy’s

insuring clause does not provide coverage for all types of losses, even where those

losses are a consequence of the loss that triggered coverage, i.e., the physical loss

to the covered property. We reject STP’s argument that the Policy must cover

delay losses because those losses were incurred as a result of the physical loss.

The Court of Appeals noted that here, like in Vision One, the insuring clause

provides coverage for direct physical loss, damage, or destruction. The court

concluded the language of the Policy’s insuring clause limits coverage to direct

physical losses and therefore does not provide coverage for nonphysical losses,

such as delay costs. Thus, the Policy plainly did not provide coverage for

nonphysical losses such as delay costs. We agree.

23 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

STP next argues that the basis of indemnity provision provides coverage for

delay losses. This provision determines what is recoverable after coverage under

the Policy is triggered. It states:

In the event of Damage to the Interest Insured, the amount payable by the Insurer shall be the full cost of reinstatement of such Interest Insured. For the purposes of calculating the full cost of reinstatement, the following provisions shall apply: A. Where Damage to Interest Insured can be repaired the cost of reinstatement shall refer to the restoration of the damaged portion of the Interest Insured to a condition substantially the same as but not better or more extensive than its condition when new. B. Where Interest Insured is: i) totally lost or destroyed or ii) damaged and the cost of repairs equal, or exceed the value of the damaged Interest Insured (whereby the Interest Insured shall be deemed to be totally lost or destroyed) the cost of reinstatement shall refer to the replacement thereof by similar property in a condition equal to but not better or more extensive than its condition when new less the value of any salvage. C. In all cases, the cost of reinstatement shall refer to the final cost to the Insured after completion of the repair, reinstatement or replacement work (including a reasonable margin for profit where such work is carried out in whole or in part by the Insured).

CP at 135 (emphasis added). STP contends that costs associated with delay

constitute a “cost of reinstatement” under paragraph C of the basis of indemnity

provision. According to STP, the basis of indemnity unambiguously and “plainly

states that what is recoverable is the ‘full’ and ‘final’ cost to repair and reinstate the

TBM plus a reasonable margin for profit.” STP’s Suppl. Br. at 24. STP argues that

24 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

by rejecting coverage for delay losses, the Court of Appeals rendered the language

“full cost” and “final cost” meaningless and ineffective, and contends that these

terms—“full” and “final”—must include all costs “incurred in connection with

repairing, reinstating, and replacing parts of the TBM to complete the Project,”

including delay-related costs. STP’s Suppl. Br. at 21.

The Court of Appeals rejected STP’s argument, reasoning that STP’s claim

that the basis of indemnity somehow creates and broadens the coverage to

nonphysical loss failed given the Policy’s express limit of coverage to direct

physical loss. STP, 18 Wn. App. 2d at 627. We agree.

This reasoning is supported by our rules of insurance contract interpretation.

When interpreting an insurance contract, we consider the policy as a whole,

according to the entirety of its terms and conditions. We will harmonize any

potentially conflicting clauses to give effect to all of the contract’s provisions. And

we give the language “‘a fair, reasonable, and sensible construction as would be

given to the contract by the average person purchasing insurance.’” Queen Anne

Park, 183 Wn.2d at 489 (internal quotation marks omitted) (quoting Queen City

Farms, 126 Wn.2d at 65)).

As stated previously, paragraph A of the basis of indemnity provision states,

“Where Damage to Interest Insured can be repaired[,] the cost of reinstatement

shall refer to the restoration of the damaged portion of the Interest Insured.” CP at

25 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

135 (emphasis added). When the insured interest must be replaced, “the cost of

reinstatement shall refer to the replacement thereof by similar property.” CP at 135

(emphasis added). And “[i]n all cases” of physical loss, damage, or destruction,

“the cost of reinstatement shall refer to the final cost to the Insured after

completion of the repair, reinstatement or replacement work (including a

reasonable margin for profit where such work is carried out in whole or in part by

the Insured).” CP at 135 (emphasis added). Read in the context of the complete

provision, the “final” and “full” costs refer to the cost to complete the actual work

to repair, reinstate, or replace the TBM. It does not extend coverage to costs

associated with delay or with “extending the project,” such as the cost to extend

leases or easements.7

Supporting this interpretation, the Policy also lists certain enumerated

“Extensions and Conditions” of coverage. CP at 111. These coverage extensions

provide additional coverage for specific costs related to the repair, reinstatement,

or replacement of the insured property following covered damage. For instance, the

Policy provides a coverage “extension” for “professional fees,” including fees for

architects, surveyors, and consulting engineers, incurred in the reinstatement of the

7 According to STP and WSDOT, their project delay losses include administrative overhead costs; transportation impacts; extended leases and easements; staff and expert costs; equipment rental; and “other costs associated with extending the project to repair, reinstate, and replace certain parts of the TBM.” STP’s Suppl. Br. at 2-3 (citing CP at 7891); STP and WSDOT’s Joint Opp’n to Resp’ts’ Mot. to Strike Portion of Pet’r’s Suppl. Br. at 4-5 (citing CP at 4720).

26 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

TBM. CP at 111, 116. The Policy also provides a coverage “extension” for costs

incurred in the removal and disposal of the debris of the insured property, detritus,

or materials brought onto the site as a consequence of covered damage. CP at 112,

116. As to the TBM specifically, the Policy provides a coverage “extension” for

the cost of “dismantling and re-erecti[ng]” the TBM for the purpose of effectuating

the necessary repairs. CP at 116-17.

Under STP’s reading of the basis of indemnity clause, the clause would

expand coverage to “all final costs,” including the costs associated with project

delays and the various extended coverage provisions would become superfluous.

Consistent with Vision One and our insurance contract interpretation framework, we

hold that the language of the insuring clause and basis of indemnity clause does not

establish coverage for delay losses.

IV. Loss of Use or Functionality

WSDOT challenges the Court of Appeals’ determination that it cannot

recover under Section 1 for loss of use of the tunneling works while repairing the

TBM. The Court of Appeals affirmed the trial court’s partial summary judgment

on this issue, ruling that the tunneling works did not sustain the requisite direct

physical loss or damage that would trigger coverage under Section 1. Great Lakes

responds that the Policy language, “direct physical loss, damage or destruction,”

requires a showing of physical alteration to the insured property. Resp’ts’ Suppl.

27 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

Br. at 22. WSDOT does not allege the tunneling works itself was physically

damaged or altered. Rather, WSDOT alleges the tunneling works suffered direct

physical loss or damage because the tunnel was “physically incapable of

performing its essential function”: completing construction of the tunnel.

WSDOT’s Suppl. Br. at 23. Therefore, according to WSDOT, it is entitled to

recover costs associated with its loss of use of the tunneling works, i.e., costs

associated with WSDOT’s inability to use the tunneling works to continue

construction. For reasons explained below, we agree physical loss or damage may

under certain circumstances include the physical loss of use of insured property.

However, this case does not present those circumstances.

The relevant provision in the Policy at issue is found in its insuring clause:

“The Insurers will indemnify the Insured in respect of direct physical loss, damage

or destruction . . . to the Interest Insured . . . .” CP at 164. The pertinent terms are

not defined in the Policy, so they are assigned their “‘plain, ordinary and popular

meaning.’” Queen Anne Park, 183 Wn.2d at 491 (quoting Queen City Farms, 126

Wn.2d at 77).

“Loss” has many definitions, but is most pertinently defined as “the act or

fact of losing[;] failure to keep possession[;] deprivation” and “the harm or

privation resulting from losing or being separated from something.” WEBSTER’S,

supra, at 1338. It is also defined as “the state or fact of being destroyed or placed

28 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

beyond recovery.” WEBSTER’S, supra, at 1338. “Damage” is a “loss due to injury .

. . or harm to person, property, or reputation.” WEBSTER’S, supra, at 571.

“Damage” also “suggests injury that lowers value or impairs usefulness.”

MERRIAM-WEBSTER ONLINE DICTIONARY, https://www.merriam-

webster.com/dictionary/damage (last visited Sept. 12, 2022) (emphasis added).

“Physical” is defined as “of or relating to natural or material things as opposed to

things mental, moral, spiritual, or imaginary.” WEBSTER’S, supra, at 1706. Further,

“physical” means “having material existence[;] perceptible especially through the

senses and subject to the laws of nature.” MERRIAM-WEBSTER ONLINE

DICTIONARY, https://www.merriam-webster.com/dictionary/physical (last visited

Sept. 12, 2022). Similarly, “physical” “applies to what is perceived directly by the

senses and may contrast with mental, spiritual, or imaginary.” MERRIAM-WEBSTER

ONLINE DICTIONARY, https://www.merriam-webster.com/dictionary/physical (last

visited Sept. 12, 2022) (emphasis omitted). Within the context of the definition of

“physical,” “material implies formation out of tangible matter.” MERRIAM-

WEBSTER ONLINE DICTIONARY, https://www.merriam-

webster.com/dictionary/physical (last visited Sept. 12, 2022). Finally, “direct”

means “from the source or original without interruption or diversion” or “without

any intervening agency or step.” WEBSTER’S, supra, at 640.

29 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

Applying these definitions, we conclude that “direct physical loss [or] . . .

damage” refers to the deprivation or dispossession of or injury to the insured

property. The deprivation, dispossession, or injury must be physical. This means

the loss must have a material existence, be tangible, or be perceptible by the

senses.

WSDOT does not allege the tunneling works itself suffered any loss or

damage that is physical, i.e., perceptible, material, or tangible. Instead, WSDOT

argues it was deprived of its use of the tunneling works due to the physical

blockage of the TBM. According to WSDOT, it must follow that this deprivation

of its loss of use of the tunnel constitutes direct physical loss or damage.

As seen above, the definition of “loss” includes “deprivation.” To “deprive”

is “to take away[;] remove, destroy,” “to take something away from,” or “to keep

from the possession, enjoyment, or use of something.” WEBSTER’S, supra, at 606

(emphasis added). And “damage” suggests an injury “that impairs usefulness.”

webster.com/dictionary/damage (last visited Sept. 12, 2022) (emphasis added).

Under these definitions, “loss” or “damage” may refer to the loss of use or

functionality of a property. But even if we agree with this interpretation, the Policy

language specifically provides coverage for physical loss or damage. The Court of

Appeals, in its decision, highlighted the Policy language and concluded that “if a

30 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

policy provides coverage for ‘physical’ loss, it does not provide coverage for loss

of use unless that loss of use arises out of or as a result of the physical loss.” STP,

18 Wn. App. 2d at 621. Thus, for coverage under the Policy, the loss of use of the

insured property must be caused by some physical condition impacting the insured

property. This conclusion is consistent with reasoning in other cases.

The Court of Appeals below cited two Washington Court of Appeals cases

that considered loss of use claims: Prudential Property & Casualty Insurance Co.

v. Lawrence, 45 Wn. App. 111, 724 P.2d 418 (1986), and Guelich v. American

Protection Insurance Co., 54 Wn. App. 117, 772 P.2d 536 (1989). In Prudential,

the court determined that an insurance company was obligated to defend an insured

party sued by a neighbor for a loss or obstruction of view. The insured homeowner

had purchased two policies: a general homeowner’s policy and a catastrophe

policy. The homeowner’s policy covered “‘physical injury to or destruction of

tangible property, including loss of use of this property.’” Prudential, 45 Wn. App.

at 115 (emphasis omitted). The catastrophe policy covered “‘damage to or

destruction of tangible property,’” including “‘loss of the use of the damaged or

destroyed property.’” Prudential, 45 Wn. App. at 117. The court highlighted that

the catastrophe policy did not limit coverage to “physical” injury or destruction,

whereas the homeowner’s policy did contain that limitation. The court reasoned

that without the “physical” requirement, “damage” to property may “encompass

31 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

damage involving diminution in the value of property, even when no physical

damage has otherwise occurred.” Prudential, 45 Wn. App. at 117. The court

further reasoned that the neighbors’ “obstruction of view” may result in a

diminution of property value and may impair the beneficial use and enjoyment of

their tangible property, thereby falling within the policy’s definition of “damage.”

Prudential, 45 Wn. App. at 118. The court held the insurance company could be

liable for damages resulting from the obstruction of view under the language of the

catastrophe policy, defining “damage” as an impairment in the use and enjoyment

of the property. It did not hold that the homeowner policy’s “physical injury”

clause provided coverage, and it suggested that the homeowner’s policy would not

cover loss of use, i.e., obstruction of view, because it was expressly limited to

physical injury. Prudential, 45 Wn. App. at 116-18.

Guelich similarly involved whether an insurance provider was obligated to

defend an insured against a neighbor’s loss-of-view claim. In that case, the Court

of Appeals held that a policy covering “physical injury to tangible property” did

not cover “[l]oss of use of a view.” Guelich, 54 Wn. App. at 118, 121. Following

the reasoning in Prudential, the court explained that losing the use of a view is not

the type of loss that constitutes “physical injury to tangible property.” Guelich, 54

Wn. App. at 120. The court, consistent with Prudential, found that the specific

policy language “require[d] a claim to allege physical injury.” Guelich, 54 Wn.

32 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

App. at 119. It also noted the alleged injury was to intangible property—a view—

and not to tangible property as the policy language required.

Additionally, the Court of Appeals in Wolstein v. Yorkshire Insurance Co.,

97 Wn. App. 201, 204, 985 P.2d 400 (1999), affirmed summary judgment in favor

of the insurer where the policy covered “all risks of physical loss of or damage” to

the insured property: a yacht. The court considered whether the policy allowed

recovery for defective workmanship or faulty initial construction. The court

determined that “the insured object must sustain actual damage or be physically

lost” to trigger coverage under this policy. Wolstein, 97 Wn. App. at 212. In

Wolstein the court recognized that a “physical loss” could include the physical

dispossession of property without any discernible physical damage to it. These

cases support the Court of Appeals’ conclusion that an insurance policy that limits

coverage to physical loss or damage will cover loss of use only when that loss of

use arises out of or as a result of the physical injury to the insured property.

Similarly, and consistent with the ordinary meaning of “physical loss or

damage,” out-of-state cases support the conclusion that these terms in insurance

contracts can refer to the loss of use of the insured property. Specifically, these

cases show how a loss of use claim is appropriate where the insured property is

rendered unfit for its intended purpose or uninhabitable based on some change in

the physical condition of the property. The reasoning of these cases showcases how

33 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

the loss of use must be caused by some physical condition of the insured property.

In Western Fire Insurance Co. v. First Presbyterian Church, 165 Colo. 34, 437

P.2d 52 (1968), the court found coverage for damages due to “direct physical loss”

of a church where the loss of use of the church was a direct result of an

accumulation of gasoline that pooled under the premises. The court reasoned that

the physical condition of the premises made it uninhabitable and thus equated to a

direct physical loss. In Sentinel Management Co. v. New Hampshire Insurance

Co., 563 N.W.2d 296 (Minn. Ct. App. 1997), a federal court considered whether

asbestos contamination constituted “direct physical loss.” It rejected the insurer’s

argument that the insured property must suffer structural damage to constitute

direct physical loss under the policy. Instead, the court concluded the physical

condition of the property, i.e., hazardous contamination by asbestos, rendered the

property useless. In General Mills, a federal court held the insured could recover

for loss of cereal product as a result of a pesticide contamination of its oats,

rendering them unfit for human consumption. The court concluded the insured

property—the food product—suffered a direct physical loss because the

contamination “seriously impaired” the property’s function and value. Gen. Mills,

Inc. v. Gold Medal Ins. Co., 622 N.W.2d 147, 152 (Minn. Ct. App. 2001). In

Gregory Packaging, Inc. v. Travelers Property Casualty Co. of America, No. 2:12-

CV-04418 (WHW) (CLW), 2014 WL 6675934 (D.N.J. Nov. 25, 2014), a court

34 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

found coverage for “direct physical loss” where an insured property—a packaging

facility—suffered a release of ammonia that rendered the facility uninhabitable.

In sum, these cases reason that the alleged loss of use of the insured property

must be a result of or caused by some physical condition that impacts the property.

The reasoning and conclusions of these cases are persuasive and consistent with the

ordinary meaning of “direct physical loss or damage.” However, even if we adopt

this interpretation of the provision, WSDOT fails.

Any alleged loss of use of the tunneling works must be a result of or caused

by some physical condition that impacted the tunneling works. Here, WSDOT

alleges the physical condition is the physical blockage of the TBM within the tunnel

and the loss of use is the inability to continue construction. However, the physical

condition—the blockage—did not cause the loss of use—the inability to continue

construction. As WSDOT explains, the TBM and tunneling works “inseparably

functioned together to construct the tunnel.” WSDOT’s Suppl. Br. at 8. Therefore,

the “tunneling works [was] unusable for [its] intended purpose of completing

construction of the tunnel” because the TBM, which was necessary to continue

construction, was inoperable and undergoing repairs. WSDOT’s Suppl. Br. at 8.

Accordingly, even if we interpreted “direct physical loss or damage” to include loss

35 For the current opinion, go to https://www.lexisnexis.com/clients/wareports/. Seattle Tunnel Partners, et ano. v. Great Lakes Reinsurance (UK) PLC, et al., No. 100168-1

of use, no coverage under Section 1 is triggered because the alleged loss of use was

not caused by a physical condition impacting the insured property. 8

We affirm the Court of Appeals and remand to the trial court.

-RKQVRQ-

:(&21&85

Okrent, J.P.T.

8 WSDOT also alleges it incurred costs in connection with construction of the access shaft to repair the TBM. WSDOT’s Suppl. Br. at 29. However, as the Court of Appeals noted, WSDOT does not show how costs associated with construction of the access shaft to repair the TBM are recoverable under Section 1. Instead, these costs are related to repairing the TBM, which is insured under Section 2.