This week’s review of common exclusions found within all-risk insurance policies focuses on the latent defect or inherent vice exclusion. While other exclusions are somewhat more straightforward – we all may have a good idea of what mold is – this exclusion first raises the question: What is a latent defect or inherent vice?
Generally, “inherent vice” implies that no external or extraneous peril caused the loss; rather, the loss or damage results from the internal composition of the property, or some aspect of the property that brings about its own destruction. See Harmon v. Safeco Insurance Co. of North America, 24 Kan. App. 2d 810, 954 P. 2d 7, 10 (1998). “Latent defect,” on the other hand, generally 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).
Of course, even those definitions are subject to interpretation. A good illustration of a latent defect can be found in Acme Galvanizing Co., Inc. v. Fireman’s Fund Insurance Co., 221 Cal. App. 3d 170, 270 Cal. Rptr. 405 (1990). There, a steel kettle at one of Acme’s plants ruptured, allowing several tons of molten zinc to spill onto surrounding equipment. Acme’s insurance claim was denied by Fireman’s on the ground that the loss was caused by a latent defect or inherent vice and was excluded.
During the investigation of the claim, Acme had an expert examine the kettle. The expert ultimately opined:
I believe that the kettle failure was principally due to poor welding techniques. The weld is just not adequate for the service intended.
Fireman’s concluded that the policy exclusion for “inherent vice and latent defect” applied and their report further explained:
In conclusion, the inadequate weld seam was an internal characteristic of the kettle which was not readily detectable upon reasonable inspection. In support of this conclusion, we observe that the defect could only be found by [your expert] after destructive testing was performed.
The court, after looking at conflicting case law and California’s Code of Civil Procedure, held that
[a] latent deficiency [i]s one which is not apparent by reasonable inspection….Here, Acme’s expert established…that the kettle rupture was caused by inadequate welding due to a defective design of the welding. The expert was able to reach this conclusion only after examining an assembly drawing of the kettle, and stated that further analysis could be made by radiographic and ultrasonic testing. We conclude such evidence establishes the welding defect was not apparent upon reasonable inspection, but was a latent defect, as a matter of law….To hold the reverse would be to render the phrase ‘latent defect’ meaningless and to transmute the insurance policy into a type of warranty.
While this case is a good illustration of one court’s interpretation of the term latent defect, California courts changed the test in a later case. No longer is a latent defect simply one that is not apparent upon reasonable inspection. Instead,
A latent defect is one which is both not readily observable and not discoverable to any but the most searching examination.
Keep in mind that these cases mentioned apply the law of their respective states, and that laws in other states may vary. Stay tuned for another edition of Deconstructing the All-Risk Policy.