131_C036
INHERENT
VICE/LATENT DEFECT EXCLUSION HELD APPLICABLE TO DISPUTED CLAIM
An 84-ton galvanizing
kettle in one of an insured's metal galvanizing plants ruptured when a welded
seam in the kettle failed, allowing several tons of molten zinc to escape.
Surrounding equipment was damaged or destroyed by the molten zinc, including
the galvanizing furnace burners and floor boards and the refractory system that
enclosed the kettle.
The insurer denied
liability on the basis of an exclusion in the pertinent property insurance
coverage for latent defect and inherent vice. It asserted that the cause of the
loss was not external; that it was within the scope of the exclusionary
language. The insured initiated legal action. At trial it was established that
the applicable insurance policy covered business personal and real property
"against all risks of direct physical loss or damage from any external
cause to such property…, subject otherwise to all of the provisions and
stipulations of the policy...." The Perils Excluded section provided as
follows:
"The Property
Coverage does not insure against loss caused by, resulting from, contributed to
or aggravated by:13. Inherent vice, latent defect, wear and tear, marring and
scratching, gradual deterioration, moths, termites or other insects or vermin,
unless by a peril not otherwise excluded ensues and then the Company shall be
liable only for such ensuing loss...."
The insured appealed trial
court judgment in favor of the insurer, arguing that, “even if the kettle
rupture was caused by a latent defect, the discharge of molten zinc which
damaged or destroyed the surround equipment was an ‘ensuing loss’ not excluded
from coverage.” It pointed to the
exception to the exclusionary clause allowing coverage for a loss precipitated
by an excluded peril where a “loss by a peril not otherwise excluded ensues and
then the Company shall be liable for only the ensuing loss.”
The appeal court, however,
found that there was no peril separate form the initial excluded peril of the
welding failure and kettle rupture in this situation. “The spillage of the
molten zinc was part of the loss directly caused by such peril, not a new
hazard or phenomenon. If the molten zinc had ignited a fire or caused an
explosion which destroyed the plant, then the fire or explosion would have been
a new covered peril with the ensuing loss covered. That did not occur.”
The appeal court concluded
that the cause of the loss was a latent defect excluded from coverage. The
judgment of the trial court was affirmed in favor of the insurance company and
against the insured.
Editors Note: Experts retained by both the insured and the insurer
testifies that the kettle ruptured due to a defectively welded seam, a defect
not readily detectable upon reasonable inspection. The insured had rejected the
insurer’s offer to advance funds for necessary repairs and to compensate for
any business interruption loss on the condition that reimbursement would be
forthcoming if judgment were rendered for the insurer.
(ACME GALVANIZING CO., INC.
ET AL., Plaintiffs, Appellants v. FIREMAN'S FUND INSURANCE COMPANY ET AL.,
Defendants, Respondents.