Resulting Loss Claims Denied

    After vandals caused extensive water damage to the insured's building, the claim for resulting loss was rejected by the federal district court. Epperson v. Lexington Ins. Co., 2025 U.S. Dist. LEXIS 102028 (S.D. Ohio May 29, 2025). 

    The insured's borrower defaulted on a loan for purchase of a 78,000 square foot building. The insured obtained a deed to the insured property through foreclosure proceedings. Upon inspection, water was seen pouring out of the building in many places, including through windows. Mold was observed on all three levels of the building.

    The insured held an all-risk policy with Lexington. The policy included a Vandalism Exclusion, barring recovery for losses caused by vandalism unless the vandalism "results in a Covered Cause of Loss," at which point the policy would pay for damage caused by the Covered Cause of Loss.

    Lexington hired an inspector who determined that vandals broke into the insured property and vandalized the property by striking sprinkler heads in the building's fire suppression system. This damage caused the sprinkler heads to activate, ultimately releasing over one million gallons of water from the building's sprinkler system. Lexington denied coverage based upon the Vandalism Exclusion. 

    The insured filed suit alleging breach of contract and bad faith. Both the insured and Lexington filed motions for summary judgment. Neither party disputed that the property had been vandalized, damaging the sprinkler system. The insured relied on the resulting loss exception of the Vandalism Exclusion. The insured maintained he sought coverage of the resulting loss from the vandalism, the water damage caused by the sprinkler leakage, rather than damage caused by the vandalism itself. Lexington argued that the vandalism exception precluded coverage of a loss caused by vandalism, such as the sprinkler leakage and related water damage. An ensuing loss clause did not cover loss caused by an excluded peril but only covered loss caused by a separate and independent covered peril. 

    Lexington pointed to two provisions in the policy that made the sprinkler leakage an uncovered cause of loss: continuous water leakage and mold exclusions. If the sprinkler leakage was not a Covered Cause of Loss, then the resulting-from exception to the Vandalism Exclusion did not apply.

    The insured argued the continuous water leakage exclusion applied to gradual seepage or leakage, which was not the case here. The court, however, was unconvinced that the exclusion only implicated a slow drip caused by an accident. By including the term "leakage," the provision encompassed the escape of water, irrespective of flow rate or total volume. Given the provision's unambiguous language excluding "loss or damage arising out of the continuous or repeated seepage or leakage of water," paired with the body of case law interpreting the exclusion, the court found that the water leakage exception applied to the sprinkler leakage here. 

    The mold exclusion precluded damage caused by "Fungus, Wet Rot, Dry Rot, and Bacteria," which included mold and mildew, unless the loss resulted in a "specified cause of loss," in which case the policy would cover up to $15,000. A specified clause of loss included leakage from fire-extinguishing equipment. But the policy did not include vandalism from the list of Specified Causes of Loss. Therefore, Lexington contended the loss caused by mold, which itself was not caused by a specified cause of loss, was not a Covered Cause of Loss. Just as with the water leakage exclusion, the mold exclusion also barred coverage. No covered cause of loss caused the damage that resulted from the vandalism and the denial of the claim was rooted in the Vandalism Exception. 

    The court also found that Lexington was entitled to summary judgment in the insured's claim for bad faith.