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From time to time, we will be posting excerpts from the Malecki on Insurance monthly newsletter. |
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To subscribe to the Malecki on Insurance monthly newsletter, please contact Malecki Communications Company at (859) 441-4045. Here are two "Answer Please" excerpts, which may be very interesting. QuestionWe are in the termite and inspection business. Recently, a claim was filed against us alleging negligence in failing to detect the presence of termites in a residence. Coverage under our commercial general liability (CGL) policy was flatly denied on the basis of the “damage to your work” exclusion (l), and impaired property exclusion (m). We do not feel that exclusion (l) applies, because we did not perform any work. By merely inspecting the premises, we performed a service. We did nothing that could be construed as work, because nothing as added, altered, removed or repaired. The CGL policy definition of “your work” suggests that the work or operation in question is going to produce some kind of tangible result. Such is not the case with termite inspection services. We also feel that the impaired property exclusion likewise does not apply based on the explanation of this exclusion in an article that appeared in the 1994 issue of Claims Magazine entitled “Impaired Property Exclusion: Using Discretion to Make it Work.” Your opinion would be appreciated. AnswerYou are correct that the “damage to your work” exclusion has no application in your circumstances, because failure to detect the infestation of termites is not work as defined in the policy. This is reinforced by subpart (b) of the definition of “your work,” which encompasses “materials, parts or equipment furnished in connection with such work or operations.” This wording clearly refers to work or operations that go beyond a service. It also should be mentioned that there is a tendency for some people to refer to exclusion (l) as the faulty workmanship exclusion. There is a distinct difference, however, between faulty work and faulty workmanship. In fact, these two terms generate a considerable amount of dialogue with respect to builders risk and other property insurance forms. Briefly, and generally speaking, faulty work, for purposes of insurance coverage, refers to the process of the work itself. Faulty workmanship, on the other hand, refers to the quality of the finished work or product itself. Thus, if one were able to say that exclusion (l) applies to the faulty workmanship of the insured, rather than the faulty work itself, there may be wider application of the exclusion. The impaired property exclusion likewise is inapplicable. The fact there was physical injury to the residence premises stemming from your failure to detect termites is sufficient to nullify the application of this exclusion. Impaired property is defined to mean tangible property other than the named insured’s work (the residence premises) that cannot be used or is less useful because the residence premises incorporates the named insured’s work that is known or thought to be defective, deficient, inadequate, or dangerous. It would be difficult to argue the applicability of this part of the definition, because nothing you did was incorporated into the residence premises. Also the repair, replacement or adjustment of your service will not restore the use of the property. Once the termites cause damage, only repair of the premises can do that. The second criterion of the impaired property exclusion is that the residence cannot be used or is less useful because the named insured failed to fulfill the terms of a contract or agreement. Let’s assume for sake of argument that you did warrant that if there were to be an infestation, it would be found. This contractual assumption, onto itself, also is not sufficient to trigger the impaired property exclusion, for the same reason as discussed above. Replacing the service you provided, i.e., fulfilling the terms of the contract or agreement will not restore the use of the residence premises. Only repairing or replacing the damaged property can do that. Since the services you performed cannot be repaired, replaced, adjusted or removed, the impaired property (residence premises) cannot be restored to use. Fortunately, there are some cases that have involved termite inspection services companies that might be of some assistance to you. In Isle of Palms Pest Control Company v. Monticello Insurance Co., 459 S.E.2d 318 (Ct.App. S.C. 1995), an insured exterminator sought coverage for a claim alleging that negligent preparation of termite inspection report resulted in continued termite damage from active infestation. The insurer argued against coverage in part on the basis that what the insured did was faulty workmanship, which was not covered by the policy. In doing so, the insurer relied heavily on the case of Western Exterminating Company v. Hartford Accident and Indemnity Co., 479 A.2d 872 (D.C. 1984). The court here held that the insurer had no duty defend a claim brought against the insured as a result of an inaccurate termite inspection letter. In this case, however, the complaint contained no allegation that the insured’s negligence caused an accident resulting in damage to tangible property. The claim was limited solely to economic damages. For this reason this case was not relied on by the court in the Isle of Palms case. The court in the Isle of Palms case, instead, held that, while a general liability policy typically does not cover claims of faulty workmanship only, it does cover claims of faulty workmanship that cause an accident, as the court found in this case; that is, the improperly performed inspection that resulted in continued termite damage. Had there been pre-existing termite damage without active termite infestation at the time of the inspection, the plaintiff’s claim against the insured would have been one for faulty workmanship resulting in only economic damages. Under that scenario, there would be no possibility of coverage, the court went on to say, because Isle of Palms’ improper inspection would not have caused the pre-existing property damage. Because the claimant in this case did allege that Isle of Palm’s negligence resulted in property damage, the policy did provide coverage. Not to be outdone, the insurer also maintained that the policy’s professional services exclusion applied. The insurer’s position, with respect to this exclusion, was contradictory. The insurer argued that even though “professional services” was not a defined term, the inspecting of homes and the issuance of termite letters were professional services excluded from coverage, whereas the actual process of exterminating is not a professional service. The court rightfully reasoned that if the process of inspection is a professional service, then the subsequent extermination would also be a professional service—given that the same specialized knowledge would be required to properly perform both acts, and given that any extermination would involve and inspection as well. The court also explained that there was no policy language supporting an inspection/extermination distinction, nor could it find any principled reason to label “inspection” a professional service, while labeling “extermination” something other than a professional service. In the words of the court, “[T]o give effect to the professional liability exclusion would render the policy virtually meaningless, because it would exclude coverage for all claims arising from Isle of Palms’ exterminating services, the very risk contemplated by the parties.” Other jurisdiction have likewise determined that damage caused by the negligence of a termite inspector is within the scope of a general liability policy. Consider Del Posing d/b/a Del’s Pest Control v. Merit Insurance Co., 629 N.E.2d 1179 (Ill. App. 1994), where an exterminator was sued alleging it negligently conducted improper inspections and failed to discover termite infestations. The court held that the termite infestation constituted an occurrence, and the damage caused by the termites was property damage, within the meaning of the policy. The case of Fowler Pest Control & Insulation, Inc. v. Hartford Insurance Co., of Alabama, 512 So.2d 88 (Ala. 1987), held that an insurer had a duty to defend an exterminator against claims of fraud in connection with the issuance of a termite letter. Coverage also was held to apply for property damage in the case of Hurtig v. Terminix Wood Treating & Contracting Co, 692 P.2d 1153 (Hawaii 1984), where an exterminator improperly performed a contract to inspect and treat a house for termites. To be frank, exterminators who perform services to detect termites are fortunate insofar as commercial general liability insurance is concerned. Short of the exterminators’ making any physical changes to tangible property of others, there do not appear to be any exclusions in the standard ISO CGL forms and many umbrella liability policies, that can be relied on by insurers. (The same cannot be said of policies written in the excess and surplus lines market.) This opinion is not necessarily limited to termite inspection companies. Any business that performs services, rather than producing a tangible piece of work or a product—a general contractor whose sole role is to read plans and specifications and supervise construction work, for example, may fall into this same category as termite inspection companies. QuestionWe have a tool rental company that rented a backhoe and attachments along with utility trailer for a period of three days. The customer signed the rental agreement and paid the charges plus the deposit. After three days had expired, the customer did not return the equipment. Apparently, the customer used a fictitious name and never intended to return the items. The local police were called and a claim was made with the insurer. After review of the circumstances, the insurer denied the claim based on two exclusions of the insured’s scheduled property floater. The first exclusion applies to loss caused by or resulting from criminal, fraudulent, dishonest, or illegal acts alone or in collusion with another by the named insured, and others to whom the named insured has entrusted the property. The second exclusion applies to loss caused by or resulting from voluntary parting with title or possession of property because of any fraudulent scheme, trick or false pretense. Do you think the insurer is on solid ground in denying coverage? AnswerYes. It appears the second exclusion is the appropriate one, referred to as “voluntary parting.” The tool rental company was tricked into renting equipment to someone who, as was said, never intended to return it. Something similar to this event occurred recently involving a company (seller) that sold 12 computers. The seller shipped them by common carrier to a fictitious person at an actual company but where that person was not employed. The seller is now out the cost of those computers. The inland marine floater contained the same exclusion for voluntary parting. The common carrier could not be faulted here, since it picked up and delivered the computers according to the seller’s shipping specifications. In both of these cases, the only solution to reducing the chances of these kinds of losses is to take added measures to ensure that those who are renting or selling property are not tricked or deceived, particularly with respect to big ticket items. Voluntary parting is a business risk and one insurers do not wish to cover. Loss control measures can reduce these kinds of losses but not entirely. Also available are the following books featuring as authors, certain of the Principals of Malecki Deimling Nielander & Associates, LLC. They can be obtained from the sources indicated. The MCS-90 Book:
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Malecki Deimling Nielander & Associates, LLC.
Specialists in Insurance Consultation and Guidance
