Insurance Article, The Insurance Times 2020, The Insurance Times June 2020

Demystifying Policy Exclusions and Conditions – Industrial All Risk

This is the first in the series of articles I plan to write on various Policy Conditions and Exclusions mainly in Property Policies as per the various Policy Wordings used in Inda.

The Industrial All Risk Policy has an interesting exclusion.

Let us try and break up this exclusion into a logical analysis and let us see the modus-operandi of this exclusion/

The Policy does not cover damage to Insured Property caused by:

Faulty or Defective Design materials or workmanship inherent vice latent defect gradual deterioration deformation or distortion or wear and tear unless damaged by a cause not excluded in the Policy ensues and then the Insurer shall be liable only for the ensuing damage.

If we look at the above exclusion we can identify the following:

  1. Defective Design is not a Peril it is a situation.
  2. Defective Workmanship is not a Peril it is a situation.
  3. Inherent Vice is not a Peril and is an inbuilt situation.
  4. Latent Defect is not a Peril it is a situation which may or may not result into something.
  5. Deterioration is not a Peril but a consequence.
  6. Deformation is not a Peril but a consequence.
  7. Wear and Tear is not a Peril but a gradual loss of value induced by something.

Defective Design is generally defined as something in a product that is so great, the product cannot be utilized for the purposes intended or is even made hazardous as a result of the defect, imperfection.

Inherent vice is the tendency in objects to deteriorate because of the fundamental instability of the components of which they are made, as opposed to deterioration caused by external forces.

Latent defect is a  problem with a product, property, etc. that is hard to notice and may not be noticed before it is bought.

Therefore there is an element of cover here too amidst the exclusions.

As we all know when a Peril Triggers we look at the Proximate Clause of Loss.

The Proximate Cause is defined as:

Proximate cause is the primary cause of a loss.

 It is not necessarily the closest cause in time or space nor the first event that sets in motion a sequence of

events leading to a loss.

Proximate cause produces particular, foreseeable consequences without the intervention of any independent or unforeseeable cause.

It is also known as legal cause.

Let us now look at the doctrines:

Scenario 1:

Let us assume that a Excluded Peril triggers an Insured Peril which then leads to a damage.

The damage thus gets covered.

Rain – Flood.

Now let us consider the case of design defect.

This is an excluded situation but it can lead to operation of an Insured Peril the damages thus caused can be called ensuing damages and are covered.

The element  or the property having the design defect is not payable as this is an excluded property

Conversely in a building there is design defect let us say in one of the beams. This design defect does not trigger any peril .

However due to mild Earthquake Cover the building collapses.

Here the  defective condition has not led to an Insured Peril but the building has collapsed and the design defect has contributed to the collapse of the building.

Here the loss will not be payable.

Excluded Peril – Insured Peril – Damage Covered

It would be interesting to read the exclusion word by word and then relate with what has been written above.

Many such incidents happen and it is important to go back to the basics of Insurance and to the wordings of the Policy.

The Insurance policy is a Contract and it is a legally enforceable contract and it is important to weigh each word of the Policy with a legal eye keeping in mind the basic principles of Insurance.

It may be pertinent to note here that Project Insurance Policies do provide for Design Defect Covers of various forms and there are different Design Defect Cover wordings available.

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