In future posts, court cases involving latent defect exclusionary language found in property insurance policies will be examined, but in order to dig in and see how the courts handle these cases, here is some background on this policy language.
When a policy covers a latent defect, the prerequisite to coverage is the requirement that the defect be undiscovered and essentially a camouflaged defect that allowed the damage to occur while the insureds were not on notice of the problem.
To do justice on this topic, it is important to understand what the insurance company is talking about when they say “latent defect” in your jurisdiction. In one case, “Latent defect,” refers to a defect not readily observable or discoverable upon reasonable inspection. See Board of Education of Maine Township High School Dist. 207 v. International Insurance Co., 292 Ill. App. 3d 14, 684 N.E. 2d 978, 990, app. Denied, 175 Ill. 2d 523, 689 N.E. 2d 1137 (1997).
Remember, for the insurance company to allege latent defect as an exclusion, there has to be something that it argues is defective. And this is where the debates get interesting. If this policy language exclusion is cited in a denial letter the policyholder should ask for more information. This exclusionary language is overused and a popular buzzword that looks good and is lumped in on a denial letter because it sounds official but it may not shape up to be a basis for denying at all.
Even if there is a defect in a component that causes a loss, a second step is required. To truly be latent, the issue has to be something that could not have been determined with a reasonable evaluation, and this makes for some really interesting litigation.
When latent defects are covered, you will likely have to press for coverage in that situation too. The carriers tend to argue that just a reasonable inspection would have placed you on notice of your defect. This is another easy out.
Marine insurance policies have long provided coverage for loss and damage caused to the vessel as a result of a latent defect.
To understand more, long time marine surveyor and author David Pascoe explains,
Say, for example, an error in the lamination of a vessel hull results in the hull breaking open, causing it to sink. In this case, if the policy had a latent defect clause, under that clause the insurance would cover the resultant damage, but not the defect itself. . . .The real problem with latent defect is in defining this term that is remarkably broad in scope: Latent means not discoverable by such inspection or test as the law reasonably requires under the circumstances. It can also mean a defect that has not become manifest yet; that is, a fault may exist within a material or component which, short of destructive testing, cannot be discovered, but which as time goes on will eventually become apparent as the part begins to fail or fails. The latent defect thus becomes a patent defect.
Pascoe traced the history latent defect and found:
The term first appeared in 1888 in the English Institute Hull Clauses, which refers to ocean marine hull insurance for ships. Heretofore, there was no reference to the term in common law; it was exclusively maritime. The concept quickly crossed the Atlantic to be incorporated into the American Institute hull clauses and thence into yacht policies and finally into common law.
Today, civil lawyers throw the term latent defect around like snowballs after a heavy wet snow, and has little to do with the maritime definitions. Latent defects have a substantial legal background and precedent upon which to draw, not only in the U.S. but particularly Europe where it originated. Even so, there remains today a great deal of controversy within the U.S. courts about the myriad ramifications of what constitutes an insurable latent defect. What with the tremendous advancements in materials these days, there are apparently no limits to the meaning of the word "defective." Because the term has a strictly maritime ancestry, the maritime context of the term should apply, along with all Admiralty case law, both English and domestic.
In my next post, I’ll look at how a federal court in Arkansas evaluated a latent defect argument where the insurers argued that the seam weld imperfection that caused the pipeline rupture was an excluded latent defect. Lion Oil, the plaintiff, responded to the court that the seam weld imperfection was not latent because it was discoverable by a careful inspection.
You can place your bets on who wins in this case in the comments section below.
In sum, remember that latent defects policy language can afford coverage in some policies but read carefully because that same language is exclusionary in others.