What happens when a claim is denied based on an exclusion in an open perils policy that doesn’t exist in a named perils policy that includes a named peril that would appear to cover the loss? In other words, is it possible that an ‘inferior’ named perils policy provides more coverage than an open perils policy? This is an issue I explore in my book “When Words Collide: Resolving Insurance Coverage and Claims Disputes.” Below is an example of an actual denied claim that was resolved in the insured’s favor by applying the principles outlined in the book.
The Denied Claim
An insured suffered water damage to the bathroom floor, most likely as a result of a leaking seal under the toilet bowl. The insurer paid the initial claim but, as repairs were initiated, the insured discovered that the damage was greater than originally contemplated in that there appeared to be structural damage and sagging of the floor. The company denied the remainder of the claim, citing the “deterioration” exclusion in the ISO HO 00 03 Special Form, and the premise that the loss was not “sudden and accidental.”
Here are the points we made to convince the adjuster to pay the claim:
- Nothing in the policy requires a loss to be “sudden and accidental” for this type of claim…the form states that it covers “direct physical loss” and there is a specific exclusion for “intentional” (i.e., non-accidental) losses. The insured certainly didn’t do it on purpose. By saying the loss must be “sudden,” the adjuster might have been thinking about the “gradual loss” exclusion for water damage that occurred over a period of “weeks, months or years”…an exclusion that was removed from the ISO form in 1991.
- In the filing memorandum from that 1991 change, ISO clearly states its intent: “Coverage is afforded unless the insured took no action to save and preserve the ceiling, walls or floors at and after the time the water damage becomes visible.” This change removed the “gradual” loss exclusion, relying on the Neglect exclusion to preclude coverage if the insured fails to protect the property from further damage.
- With regard to “deterioration”, the exclusion applies to “Wear and tear, marring, deterioration” as a group, implying that the type of damage intended to be excluded involves the reduction in value that occurs during normal wear and tear that is foreseeable and not unexpected. It is arguable that “deterioration” should be considered in the context of the exclusionary losses with which it is grouped. Determining what a specific term means in a list of terms involves a legal contract interpretation principle called noscitur a sociis (“it is know by its associates”), a concept explained in the book.
- In this specific case, the “deterioration” is not a cause, it is the result (the damage itself) for which the direct, proximate cause is a peril (water damage) which the policy covers and which, by act of paying the initial claim, the insurer has admitted is covered—QED.
- Finally, this loss would be covered by the ISO HO 00 02 Broad Form. It provides the same “water damage” coverage but, being a named perils policy, it does not include the open perils exclusionary wording “deterioration.” Using the same 1991 Homeowners filing explanation cited above, “This change is being made to avoid having the Special Coverage forms provide lesser coverage than what is provided under a Named Perils form….”
I have used that last point, referencing the 1991 ISO HO filing, probably dozens of times to get claim denials reversed on the premise that a named perils policy should not provide superior coverage to the more expensive and generally broader open perils policy.
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