A dairy product manufacturer sued its insurer after the latter denied a loss under a boiler and machinery (equipment breakdown) policy. The policyholder sought coverage for having to respond to customers who were harmed by receiving product that was contaminated by bacteria.

The contamination occurred during pasteurization. However, the insured and its insurance company litigated their dispute after the portion of the claim involving damage to their equipment was denied.

Click below for information on how the courts viewed a key issue: the policy’s exclusions on water damage and corrosion.

The dairy product maker and its equipment breakdown coverage insurer were tangled in a very common scenario. They saw the applicable policy’s language quite differently.

Ideally, policy language should support a clear coverage intent that is understood by both parties to the insurance contract. In our featured case, the policyholder did not accept the rejection of its claim. There was no dispute that the policy contained exclusions with regard to both water damage and corrosion. The disagreement involved whether those exclusions applied to the loss. In the end, two court decisions resulted in decisions that the policyholder was owed coverage.

Click here for an example of how a standard equipment breakdown policy addresses losses involving various perils. It is from the Commercial Property section of PF&M found in Advantage Plus.

Regardless the line of business, the insurer’s response after a loss is submitted is often to examine and pay the claim. Payments are subject to coverage limits and, when applicable, deductions. However, many other situations are handled differently, and coverage eligibility is questioned.

Loss circumstances are routinely reviewed. Insurer obligations aren’t to automatically make payments, but to make payments according to contracted obligations. When a loss does not qualify for protection, denial is merited.

Unfortunately, a form of myopia can occur when investigating and responding to losses. It may also occur when losses are submitted. That could have been the case in this dispute. It appears that the insurer strongly focused on applying possible exclusions inappropriately. It also appears that, at the same time, the policyholder’s submission may have been in error.

Click here for a short list of insurance terms that could have clarified understanding of the dispute in our featured case. It is from Insurance Words found in Advantage Plus.

Naturally, it’s quite easy for a disinterested party to sit back and pick apart decisions made by others. They don’t have any skin in the game. Besides the absence of any financial stakes, disinterested parties don’t have to deal with pressure caused by contractual or time constraints. These are factors that frequently affect judgment.

The parties may have focused on the wrong area. It seems apparent that the contamination involved the intended use of the policyholder’s equipment. It may have made sense for the insurer to base the denial on wear and tear, maintenance and possible lack of inspection of the metal plates of the equipment’s heat exchanger. Did deterioration of insured equipment that took place over the course of its regular operation qualify as an eligible occurrence?

Click here for an article that discusses protection provided under an equipment breakdown policy. It is from Emarketing for Agents found in Advantage Plus.