Everything Dies Eventually
(c) 2019 by Barry Zalma and adapted from my book Zalma on Insurance Claims Part 104 now available at https://www.amazon.com/Zalma-Insurance-Claims-Part-Practicalities/dp/1718186894/ref=sr_1_15?ie=UTF8&qid=1534861356&sr=8-15&keywords=%22zalma+on+insurance+claims%22 and http://zalma.com/blog/insurance-claims-library/
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.
The plain meaning of the exclusion was to relieve the defendant of liability for loss or damage to covered property caused by rust, corrosion, and deterioration. The defendant met its initial burden of establishing its entitlement to judgment as a matter of law by demonstrating that the exclusion applied to the loss in this case, and, in any event, that the plaintiffs failed to sustain their burden of proving that the loss occurred during the policy period…
The courts have adopted a subjective test of fortuity. If the insured was not aware of the defect or vice inherent in the insured property, the damage resulting from that defect was unanticipated or unforeseen. The loss is fortuitous from the standpoint of the insured and is within the coverage.
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 determining that damage to the insured dwelling was fortuitous, the court in Millers Mutual stated:
It is true that all the expert witnesses, who, after the damage, examined the underlying structures of the earth, noted the capacity of the soil to absorb water and saw evidences of earth movement, said that damage similar to that which occurred was inevitable. We are not told who, at the time the insurance contract was executed, had certain knowledge that the damage was inevitable. (Emphasis added).
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. The Court of Appeal predicted that Pennsylvania would adopt the definition of a fortuitous event contained in the Restatement of Contracts. Insurers cannot avoid liability for what appears to be inevitable losses by relying upon the fortuity requirement alone.
It seems that “wear and tear” should not be limited to “ordinary” wear and tear but also extraordinary wear. As one court indicated:
An excessive degree of abrasion does not necessarily preclude a finding of wear and tear. The magnitude of the abrasion found merely manifests the effect of a process—perhaps beginning as ‘ordinary’ abrasion—that intensified over time. The fact that the extent of abrasion was unusually severe does not demonstrate that the abrasion process itself was extraordinary. It might well have been the culmination of a process which commenced long before. Potomac Electric Power Company v. Arkwright-Boston Manufacturers Mutual Insurance Company, No. 85-1702 slip op. (D.D.C. January 23, 1987).
Where the excluded event is the only cause of the loss, the loss is not covered. In Peery v. Security Ins. Co., No. 83-185 II, 1984 Tenn. App. Lexis (Tenn. Ct. App. Apr. 6, 1984), the all-risks policy excluded coverage for damage due to wear and tear “unless any such loss or damage is the direct result of other physical damage covered by this policy.” The court held that the loss was not covered because there was no showing that the loss occurred from any reason other than wear and tear.
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.
“A policy will define latent defect” as “a hidden flaw inherent in the material existing at the time of the original building of the yacht, which is not discoverable by ordinary observation or methods of testing.” “The word “inherent” requires that a latent defect be characteristic of or intrinsic to the material. The word “flaw” imposes the exact opposite requirement. It includes problems with a specific piece of material, but not problems characteristic of the material itself. In short, giving the terms their plain and reasonable meaning, there can be no such thing as an inherent flaw.” (Ardente v. Standard Fire Ins. Co., 744 F.3d 815 (1st Cir. 2014))
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.” As an alternative basis for excluding the plaintiffs’ loss, the court then went on to consider briefly the “inherent or latent defects” exclusion. Contrasting Essex House v. St. Paul Fire & Marine Insurance Co., 404 F. Supp. 978 at p. 992 (where visual inspection of building and plans would have revealed construction defects) with Merz v. Allstate Ins. Co., 677 F. Supp. 388, 389 (W.D.Pa.1988) (where construction defects were all “unknowable, concealed by the ground”), the court held that the two cases, read together:
suggest a general principle that defects in construction may constitute inherent or latent defects if the problems thus created are not readily discoverable. Tzung, supra, at p. 1342.
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.
Refusing to apply a “latent defect” exclusion:
the district court held, and we agree, that as a matter of the literal language of this term, ‘latent defects’ are only those integral to the damaged property by reason of its design or manufacture or construction. U.S. West, Inc. v. Aetna Casualty & Surety Co., 117 F. 3d 1415 (4th Cir. 07/16/1997).
However, in St. Mary’s Area Water Authority v. St. Paul Fire & Marine Insurance Co., 472 F.Supp.2d 630 (M.D.Pa. 2007) the latent defect exclusion was applied since the plaintiff’s experts both traced the cause of a leak to a defect in a pipe.
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.
In Carty v. American States Ins. Co., 7 Cal. App. 4th 399 (1992), 9 Cal. Rptr. 2d 1 at pages 403 – 404, 9 Cal. Rptr. 2d 1, the court held that construction defects in the plaintiffs’ home, consisting of inadequate compaction of fill, inadequate reinforcement of the concrete slab, and lack of anchoring of the foundation to bedrock, were latent because they were discovered only by “expert examination, including soil testing” and, hence, were “neither readily observable nor apparent on reasonable inspection.”
I believe a “reasonable inspection” for purposes of the latent or inherent defect exclusion may, under some circumstances, include but not require appropriate expert assistance or analysis. This is the position taken by the California Court of Appeal in Chadwick v. Fire Ins. Exchange, 17 Cal. App. 4th 1112, 21 Cal. Rptr. 2d 871 (Cal. App. 1 Dist. 1993).
In Winston Square Homeowner’s Assn. v. Centex West, Inc., 213 Cal. App. 3d 282, 291, 261 Cal. Rptr. 605 (1989), the court found that drainage problems in a townhouse development were patent, not latent. The cause of the problem—the contours of the land and the slant of the pavement which did not allow for proper drainage—and the manifestations of the problem—ponding of water at various places throughout the development—were obvious.
Where defective construction, design, or fabrication of property results in the property’s failure or deterioration before its normal life, and the defect is not apparent upon reasonable inspection but only after a post-failure examination by an expert, then the resulting loss is caused by a “latent defect.”
A majority of courts hold that the ensuing loss exception is applicable when the loss is the result of an independent or superseding cause that is covered under the terms of the policy. Consider Arnold v. Cincinnati Ins. Co., 276 Wis.2d 762, 688 N.W.2d 708, 715–16 (App.2004) that concluded that “an ensuing loss must result from a cause in addition to the excluded cause”. (Peek v. American Integrity Ins. Co., 181 So.3d 508, 40 Fla.L. Weekly D2199 (2015))
Read about this and more than 2850 posts at http://zalma.com/blog.