Latent Defect Exception

 

February 9, 2015

 

The insured, a yacht owner, brought an action against the insurer, alleging a breach of contract and bad faith failure to pay an insurance claim. This case is Ardente v. The Standard Fire Ins. Co., 744 F.3d 815 (1st Cir. 2014).

 

Standard Fire insured Ardente's yacht. At some point after purchasing the yacht, Ardente noticed that its top speed had decreased and that it was not navigating properly. The parties agreed that these were symptoms of water damage to the hull. Water was seeping into the balsa wood around the installation holes and then spreading throughout the hull.

 

Ardente presented a claim to Standard Fire, but the insurer denied coverage on the ground that the claim fell within an exclusion for manufacturing defects. Ardente sued for coverage. The district court granted summary judgment in favor of Standard Fire, and this appeal followed.

 

The United States Court of Appeals, First Circuit, noted that this case asked only whether Ardente's loss was covered by the policy. The policy explicitly disclaims coverage for loss or damage caused by or resulting from defects in manufacture, including defects in construction, workmanship, and design other than latent defects as defined in the policy. Both the insured and the insurer agreed that the use of balsa wood instead of solid laminate constituted a manufacturing defect, but they disagreed over whether the defect falls within the latent defect exception.

 

The policy defines “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.” Standard Fire argued that the material (the balsa wood) was not flawed in any way; it only did what balsa does, that is, absorb water. Ardente countered that while balsa wood itself was not flawed, the use of balsa wood instead of solid laminate was certainly a flaw. The court said that the definition refers to flaws in the material used to build the boat that were not noticeable, and the definition conveys that the flaw must impugn the material in a way that evaded observation at the time it was handled.

 

The court decided that Ardente's interpretation would allow the latent defect exception to swallow the manufacturing defect exclusion. The court concluded that because the damage to Ardente's yacht did not fall within the latent defect exception, Standard Fire was entitled to summary judgment.

 

Editor's Note: The U.S. Court of Appeals examined the definition of the term “latent defect” and found that the defects in the yacht must impugn the material in a way that evaded observation at the time it was handled; that is, the flaws in the material used to build the boat were not noticeable. All the parties in this case agreed that the use of balsa wood constituted a manufacturing defect, but this was not a flaw inherent in the material and so, the latent defect exception to the exclusion was not applicable.