Contract Cancellation Cause of Loss

We have a client who ordered $20,000 worth of new kitchen cabinets before they had a fire. The cabinets were never actually manufactured before the fire occurred, however, the contract contained a clause that in the event that the order was cancelled, there would be a 15 percent fee to cover design expenses.

Since the homeowner had no use for the cabinets after the fire, they cancelled the order and incurred a $2,912.16 design fee.

Because the cancellation is a direct result of the fire, we believe that it is covered. The order had nothing to do with the fire, but the cancellation was only because of the fire.

Ohio Subscriber

The policy language does not support your conclusion. The policy, which is not an ISO form, covers “the reasonable increase in living expenses necessary to maintain your normal standard of living when a direct physical loss we cover makes your residence premises uninhabitable.” The cabinets did not sustain a direct physical loss; the insured suffered financial loss as a result of a contract being cancelled. The insured elected to cancel the contract, but he could have just as easily elected to purchase the cabinets for use in his rebuilt dwelling. Although he suffered an out-of-pocket expense, this loss is proximately caused by cancellation of contract and not by the fire.