EXCLUSIONS IN PROPERTY INSURANCE POLICIES - New Appleman on Insurance Law Library Edition, Chapter 43

By Rene L. Siemens, Vincent E. Morgan, Alyson R. Parker, Dawn M. Jenkins

This chapter discusses exclusions that are often found in property insurance policies, with a particular emphasis on the All-Risk Form.[1]  The All-Risk Form, which covers all causes of loss to property unless specifically excluded, has predominated in the property insurance market because of the benefits it provides to both insureds and insurers.  For insureds, the All-Risk Form eases concerns about gaps in coverage; for insurers, it promotes efficiency by reducing the probability of underwriting the same risk multiple times.  In addition to the All-Risk Form (also referred to as the Special Form), this chapter discusses the Basic Form[2] and the Broad Form[3]--standard "named peril" policies that provide coverage only for certain enumerated causes of loss. 

Property exclusions vary widely, and the language in any particular policy is critically important.  This chapter is intended to provide an examination of common property exclusions and their judicial interpretations.  Although questions of causation are also of vital importance in determining whether a given exclusion applies, particularly when an excluded cause of loss combines with a covered cause of loss, those questions are generally beyond the scope of this chapter.  For a discussion of causation, see Chapter 44 below. 

Also crucial to the coverage analysis is an understanding of which party bears the burden of proof, as this may be outcome determinative.  Insureds generally bear the burden of proving that coverage for a particular cause of loss is triggered, while insurers bear the burden of proving any exceptions to coverage.  When an exclusion applies, the burden usually shifts back to the insured to establish any exceptions to the exclusion.  For further explanations of the burden of proof applicable to insurance policies, see Section 18.01[2] above, and Section 43.02[1][b] below.

Many of the exclusions analyzed below provide exception for loss ensuing from the excluded peril.  An understanding of these "ensuing loss" provisions is crucial to interpreting property exclusions.  For further discussion of ensuing loss, see Section 44.05 below.

This chapter first discusses exclusions applicable to all property in Section 43.02, and then proceeds to address exclusions applicable only to real property and improvements in Section 43.03. 

Section 43.02[1] analyzes the most fundamental of all exclusions, included in every property policy: the exclusion for loss caused intentionally by the insured.  Although an insured's negligent acts or omissions are not excluded from coverage, an insured may be penalized for failure to look after the property or rewarded for efforts to protect the property.  So, a policy may limit recovery for losses to a vacant property under the vacancy exclusion, see Section 43.03[10], but it may also provide an exception to the water damage exclusion for losses caused by an automatic sprinkler system intended to fight fires, as explained in Section 43.02[3][e].  Similarly, a policy may exclude coverage for leaks caused by freezing pipes unless the insured uses its "best" efforts to keep the plumbing heated or drained of liquids, see Section 43.03[4][d].

The next group of exclusions found in the typical property policy relates to disasters-both natural and man-made-such as earthquake, flood, war, terrorism, and nuclear hazard.  The scope of these exclusions can be exceedingly nuanced. 

Section 43.02[2] discusses the earth movement exclusion.  Most property policies often exclude losses from earth "shifting" or "settling," but provide coverage for a building "collapse" due to lack of structural integrity.  The application of this exclusion may depend upon the speed and degree of earth subsistence, as well as whether the earth movement is natural or man-made.

Section 43.02[3] analyzes the flood exclusion.  Whether water damage to property is excluded as "surface water," "subsurface water," or "flooding" depends upon the divergent and often inconsistent judicial definitions of those terms.  Once again (absent policy language to the contrary), natural occurrences generally fall within this exclusion while man-made flooding, such as a broken water main or a failed dam, does not.  Section 43.02[4] explains various limitations on the water damage exclusion.  For example, there is a split of authority regarding whether the water damage exclusion precludes coverage for damage caused by frozen or freezing water.

Section 43.02[5] addresses exclusions related to violent uprisings and armed hostilities.  Sections 43.02[5][a]-[e] explain that for the "war" exclusion to apply, armed hostilities between two or more states or sovereign entities must be ongoing.  Losses resulting from usurped power, insurrection, invasion, rebellion, and civil war are also typically excluded from coverage, see Sections 43.02[5][g]-[i].  In contrast, as discussed in Section 43.02[5][f], losses resulting from domestic riot and civil commotion are generally covered.  The unique problems presented by acts of terrorism are addressed in Section 43.02[5][j].

Most property policies also exclude losses caused by nuclear radiation, regardless of the event triggering the radiation, see Section 43.02[6].

Sections 43.02[7] and 43.02[8] analyze the exclusions for losses resulting from enforcement of ordinances or decisions by a government authority, respectively.  The "ordinance or law" exclusion precludes coverage for losses related to compliance with building codes, for example, while the "governmental authority" exclusion precludes coverage for seizure, condemnation, or confiscation of property by a government actor.

The exclusion for losses caused by failure of electrical and other utility services is covered in Section 43.02[9].

Another group of exclusions relates to causes of loss which are hidden or slow-moving, such as faulty design, faulty workmanship, mold, rust, or corrosion, inherent vice and latent defect, and wear and tear.  The first three apply to all property types while the latter exclusions apply to real property and improvements.

Section 43.02[10] analyzes the "mold" exclusion, for which questions of causation and ensuing loss are particularly important to the coverage analysis. 

Section 43.02[11] explains the meaning and application of the "faulty workmanship" exclusion. The faulty workmanship and faulty design exclusions are commonly disputed in the construction industry.  Some courts limit the faulty workmanship exclusion to defects in the final product, while others apply the exclusion to all losses caused by negligence during construction, even those caused by third parties.

Some property policies may purport to exclude coverage for otherwise covered weather-related events that combine with an excluded peril, as noted in Section 43.02[12].  This limited exclusion is intended to counteract the application of the efficient proximate cause rule, but it is not enforced in all jurisdictions.

The "wear and tear" exclusion precludes coverage for normal or ordinary damage to property that occurs over the period of its useful life, as explained in Section 43.03[1].  The related exclusion for "corrosion," addressed in 43.03[4], excludes coverage for rust, decay, and deterioration of property.  A "mechanical breakdown" of the moving parts of machinery will also be excluded if the breakdown results from internal defects in the machinery, see Section 43.03[2].  All three of these exclusions relate to the broader concept of "inherent vice or latent defect," described in Section 43.03[3].  This exclusion, which is based upon the notion that fortuitous losses are not covered, applies to perils that are intrinsic to or hidden within the property itself. 

The scope of the "pollution" exclusion, analyzed in Section 43.03[5], has been the subject of much dispute.  In the property insurance context, most courts limit the exclusion to "environmental pollution" as that term is commonly understood.  So, for example, certain indoor contaminants like mold may not be considered "pollution" and may therefore fall outside of the exclusion.

The cost of removing insects and other pests from property is excluded, see Section 43.03[6], but losses ensuing from animal and insect damage are covered. 

If leakage or seepage of water (including humidity or vapor) occurs for a period of longer than 14 days, damage to real property caused by the seepage may be excluded from coverage, as discussed in Section 43.03[7].

Also excluded from the typical property policy are certain losses caused intentionally by third parties, such as theft by employees, see 43.03[8], and vandalism by non-employees, see 43.03[9]. 

Vacancy of property, as mentioned above, could limit the insured's recovery of damages.  But if a court interprets the "vacancy" clause as an exclusion, rather than as a condition, the insurer will carry the burden of proof, see Section 43.03[10][b].

"Electrical arcing," is an exclusion for losses resulting from the interruption of an "artificially generated electrical current."  As explained in Section 43.03[11], the wording of this exclusion has become more technically sophisticated in order to capture a broader spectrum of activities that might be affected by a "short circuit." 

As a final note, it is important to consider how the characterization of the loss itself may impact the application of various property exclusions.  First, a particular loss may be excluded under multiple policy provisions.  For example, damage caused by mold may be excluded both as "fungus" and, in some jurisdictions, as "pollution."  Damage to a building's foundation caused by earth freezing may be precluded by both the earth movement and the water damage exclusions.  Second, losses may be excluded if classified as one cause of loss, but covered if classified as another cause of loss.  For example, losses resulting from civil commotion or riot are generally covered, while losses caused by civil war or insurrection are not.   

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Rene L. Siemens, Vincent E. Morgan, Alyson R. Parker, Dawn M. Jenkins

René L. Siemens is a partner is the insurance recovery practice group of Pillsbury Winthrop Shaw Pittman LLP.  He is a nationally recognized insurance coverage practitioner who represents policyholders in negotiations and disputes with their insurers, and has been ranked as a leading practitioner in Chambers USA, the PLC Cross-Border Insurance and Reinsurance Handbook, and Legal 500. His insurance coverage practice runs the gamut from major environmental, asbestos, nuclear, and product claims to large property and business interruption losses; disputes under D&O, E&O, and fiduciary liability policies; and advertising, aviation, bond, clinical trial, credit, cyber-security, employment, insolvency, intellectual property, life, media, mold, privacy, and warranty coverage issues.

Vincent Morgan is a partner in the Houston office of Pillsbury Winthrop Shaw Pittman LLP who has represented corporate policyholders in obtaining coverage through negotiation, litigation and arbitration in a wide variety of insurance coverage matters involving both first-party and third-party claims.  He is a member of the Editorial Board of the Insurance Litigation Reporter, has co-authored three treatises and written dozens of articles in the field of insurance law.  His work has led to recognition in various publications such as The Best Lawyers in America, Chambers USA, and Euromoney's Guide to the World's Leading Insurance and Reinsurance Lawyers

Alyson R. Parker is an associate in Pillsbury Winthrop Shaw Pittman LLP's Los Angeles office.  Since starting with the firm, she has focused on representing corporate policyholders in insurance litigation.  During law school at the University of Southern California, Ms. Parker served as the Articles Editor for the Southern California Review of Law and Social Justice, and is published in the same journal.

Dawn M. Jenkins is an associate with Pillsbury Winthrop Shaw Pittman LLP in Houston, Texas.  She is a magna cum laude graduate of the University of Houston Law Center, where she served as an Associate Editor of the Houston Law Review.  Her practice focuses on insurance recovery and intellectual property litigation.

The authors also wish to gratefully acknowledge the assistance of their colleagues Kim Buffington, Mariah Brandt and Ellen Cohen in preparing this chapter.

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[1]     ISO 10 10 06 07.

[2]     ISO 10 10 06 07.

[3]     ISO 10 20 06 07.