This one just doesn't meet the "acid test" of insurance contract interpretation, pun intended. Sulfuric acid and the commercial property policy's rust or wear and tear exclusion is the subject. It's funny how what seems clear and simple almost never is. That's why there are mechanics (in every field).
A business with chemicals stored in tanks had a tank valve crack, either because it became rusty or just plain worn. Sulfuric acid spewed onto the insured's property.
This is important because not only the cost of the acid is at stake. That could be the least of it. The CP policy has an Additional Coverage that covers expense to extract pollutants from land at the insured premises if the discharge of the pollutant is caused by a covered cause of loss. There is a $10,000 limit to pollutant clean-up coverage. For example, if lightning hit this tank — certainly a covered cause of loss — and caused it to rupture, the insured would be able to recover both the cost of the acid and up to $10,000 for the expense to clean up the mess. I'm using the Insurance Services Office (ISO) building and personal property coverage form (CP 00 10 04 02) and the causes of loss — special form (CP 10 30 04 02).
There is no question that the acid was the insured's business personal property. None of the policy's Property Not Covered provisions apply. The next hurdle is whether the loss of the acid was by a covered cause of loss. Coverage was written on a Special Causes of Loss form, so any cause of loss not excluded is covered. If the sulfuric acid was damaged by a covered cause of loss, there is insurance recovery available for both the cost of the acid and $10,000 for pollutant cleanup coverage.
The insurer denied the claim based on rust, corrosion, wear and tear, or deterioration of the valve, all of which are specifically excluded under the Special form. And, in the professional opinion of the claims adjuster for the insurer, as there was no covered loss to covered property, there is no pollutant cleanup coverage.
So the question is simply enough framed: does the wear and tear or rust exclusion apply to the facts at hand? The answer is a lot harder to work through.
Let's examine the exclusion(s):
"We will not pay for loss or damage caused by or resulting from (emphasis added) any of the following:
- Wear and tear;
- Rust or other corrosion, decay, deterioration, hidden or latent defect, or any quality in property that causes it to damage or destroy itself."
It seems so simple to say that the loss of the sulfuric acid was the result of the wear and tear or rusting of the valve. And that may be the correct answer, but let's take an opposing view (the one the insured and his proponents are proposing).
The loss to the acid was not by rust or wear and tear. The acid did not rust, the acid did not deteriorate, the acid did not wear out. In this view, the damage to the valve was by rust, wear and tear or deterioration. Therefore, the damage to the valve (or tank, if they are inseparable) is appropriately excluded, but the damage to the acid itself is by something else, call it spillage or leakage or disappearance, all of which are not excluded under the Special Causes of Loss form.
Now we're troubled by the language "resulting from." The lead-in language to the section of exclusions containing the wear and tear and rust provisions is, "We will not pay for loss or damage caused by or resulting from any of the following (emphasis added again). Arguing the pro-coverage position, this is just two ways of saying the same thing. The damage to the valve was caused by and resulted from rust — not that the damage to the valve was caused by rust and the loss of the acid was the result of the rust.
I'm bothered by that. I've seen that the drafters of insurance policies do not purposely throw in redundant terms. I try to read insurance policies like each word or phrase adds meaning. The drafters were not simply repeating themselves with the use of the "caused by or resulting from" phrasing; they were trying to get at something — I think that the "caused by" is the immediate causation and the "resulting from" is the direct damage flowing from that causation. (Drafters are not always successful; that's what sets up ambiguities in insurance policies, and those, of course, are interpreted against the insurer as the offeror of the contract in the "contract of adhesion" transaction.)
In talking to a lay acquaintance with experience in the manufacturing world about this issue, he has no problem with this being an excluded situation. He states that "PM" (preventative maintenance) is a hallmark of manufacturing risk management, and that someone working with sulfuric acid who does not have a program of inspecting valves keeping the acid contained would be foolhardy.
That sort of implication might be read into the exclusion. Note that there is some additional language at the end of this exclusion section: "But if an excluded cause of loss…" (rust, wear and tear, etc.) "results in a `specified cause of loss,'" (a defined term meaning fire, etc.) "…we will pay for the loss or damage caused by that `specified cause of loss.'" That means that if the valve had decayed, allowing acid to spill and, interacting with other elements, caused a fire, the fire damage would be covered.
So there is some coverage where the excluded items cause a certain kind of damage (fire, explosion, and the other "specified perils"). But the drafters may have intended to limit liability here; after all, this might represent a "morale" hazard, in that, if the insured knows that damage from regular maintenance left undone will result in covered loss, how likely is the insured to take on preventative measures.
I'm going to come down against covering the acid and the clean up of the acid. The loss to the acid was the direct result of wear and tear or rust. Splitting the hairs so finely that we could say the damage to the valve was wear and tear but that the loss of the acid was by spillage guts the "or resulting from" language, rendering it, and maybe the intent of the drafters, meaningless.
This is not to say that the exclusion is artfully drafted. Using the phrase "caused by or subsequent to" rather than "caused by or resulting from" might have made the provision more clear. But just because a word or phrase can be pretzeled or tortured into an ambiguity in meaning, does not mean the insured gets the benefit of that meaning. Where it is so that the insured gets the benefit of ambiguity in an insurance policy, the differing meaning proposed must be reasonable. Simply because a meaning can be stretched to fit doesn't mean it fits.
Bruce Hillman, J.D., is editorial director, Professional Publishing Division, of the National Underwriter Co.
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