Two Important Exclusions

A Video Explaining Wear and Tear and Inherent Vice

A Video Explaining Wear and Tear and Inherent Vice

Wear and Tear

It is inevitable that objects deteriorate over time and wear out. Even the pyramids in Egypt show wear and tear after more than 4000 years being abused by sand and wind storms.

Recent decisions of the courts of appeal have gone through such changes that even an inherent vice of the insured property—a condition certain to result in loss—rarely falls within the parameters of a non-fortuitous loss.

The Restatement of Contracts 291, Comment a, holds that a loss is not fortuitous “if it results from an inherent defect in the object damaged, from ordinary wear and tear, or from the intentional misconduct of the insured.”

In a case dealing with a boat that was left completely uncovered in the Bahamas during the rainy season, ‘normal wear and tear’ resulted in the sinking of the boat. Rainwater entered the boat, forcing the bilge pump to operate continuously for several days. This drained the boat’s battery, causing the pump to stop functioning. Batteries do not last forever. While the battery may have had enough power to start the engine, it obviously did not have enough power to operate the bilge pump for two days. The deterioration of a battery constitutes normal wear and tear, is not fortuitous, and is not compensable under a policy of insurance.

We think it inappropriate to cause the insured to suffer a forfeiture by concluding, with the aid of hindsight, that no fortuitous loss occurred, when at the time the insurance took effect only a risk was involved as far as the parties were aware. See Millers Mutual Fire Insurance Co. v. Murrell, 362 S.W. 2d 868, 870 (Tex. Civ. App. 1962). De Guinee v. Insurance Co., 724 F. 2d 369 (3rd Cir. 12/22/1983).

In Compagnie des Bauxites de Guinee v. Insurance Company of North America, 724 F. 2d. 369 (3d Cir. 1983), an insured brought suit against its all-risk insurer to recover business interruption losses arising from the structural failure, collapse, and deformation of a tippler building and crusherhouse used in the mining of bauxite ore. The trial court found no coverage because the damage resulted from the defective design of the building and was not fortuitous.

Latent Defect

Cases that provide coverage despite an exclusion for latent defects fall generally within two categories. The court determines either that:

"the defect could have been discovered through appropriate testing and it is
therefore, not latent; or the loss resulted from a contributory covered risk."

In Tzung v. State Farm Fire and Cas. Co., 873 F.2d 1338 (9th Cir.1989), the court first held that damage due in part to inadequate protection against soil expansion was excluded under a policy exclusion for “faulty materials or workmanship.”
Because the design and construction defects at issue in Tzung—described as “imbedded in the ground”—were discoverable only through expert examination of the apartment building “and the soils beneath it,” they were not “readily discoverable.”

In light of Tzung’s evident approval of Essex House, supra, it does not appear to stand for the general principle that defects discoverable only by expert examination are per se latent. As explained above, a standard that classes as latent or inherent all defects whose discovery requires expert examination or analysis sweeps too broadly. From the viewpoint of an insured who is not an expert at detecting such defects, the exclusion would become meaningless.

In Winans v. State Farm Fire and Cas. Co., 968 F. 2d 884 (9th Cir.1992) at pages 886 – 887, the Ninth Circuit adopted the latency test that the defect be “not apparent upon reasonable inspection” and held that a defect is latent if it is discoverable only through an “intensive post-failure expert examination.” In Winans, after the plaintiffs had noticed cracks and separations in footings, slabs, walls, and ceilings in their home, State Farm hired subsurface exploration experts to investigate the cause of the damage. In rejecting the plaintiffs’ assertion, the experts had discovered the contractor’s negligence after their preliminary inspection, which consisted of a visual inspection and the digging of two shallow test holes, the court impliedly found that such a preliminary inspection would in fact meet the test it had established.

This test places an almost impossible burden on the insurer and does violence to the intent of the policy. In most cases, the studies required to establish an “inherent vice” exclusion would cost more than the loss itself. Contracts of insurance must be enforceable. The test proposed by the Winans court is too burdensome.

ZALMA OPINION

It is essential that every property insurance claims professional must understand what comprises wear and tear and what is needed to prove the existence of an excluded inherent vice. The adjuster with such knowledge and the assistance and counsel of a competent and knowledgeable insurance coverage lawyer.

© 2021 – Barry Zalma