Does Property Insurance Cover Product Warranties? – Claims Magazine
ISSUE:
The insured company, covered under an ISO CP 00 10 10 91 and 10 30 10 91, suffered hail damage to the corrugated steel roof of its main building. Because the roof was damaged, the manufacturer withdrew the 20 year warranty which had been included in the purchase price of the roof. The manufacturer refuses to warrant the roof, even if the dents are removed and the entire roof is resprayed, because there is a concern that it will now be more susceptible to corrosion. The insured insists on having a new roof installed even though the old roof is repairable. Is the insured entitled to a new roof?
ANALYSIS:
Many product warranties contain provisions which allow a manufacturer to cancel the warranty for certain reasons, including damage to the warranted property. The policy covering the loss covers direct physical loss to covered property. Does the loss of the warranty on the roof constitute a direct physical loss under the policy and, if so, is the insured entitled to a new roof even though the hail did not render the roof a total loss?
There are no exclusions in the CP form which are applicable to a loss of warranty. If the term "direct" is interpreted as meaning "immediate" or "proximate" rather than "remote," the cancellation of the warranty could easily be viewed as a direct result of the covered hail damage. Also, it could be argued that if the insurer wanted to exclude a loss of warranty it could have easily done so in an exclusion similar to the one for "delay, loss of use or loss of market." There is, however, an argument that can be made that the inclusion of the word "physical" as a modifier of "direct loss" would exclude the loss of warranty portion of the claim from coverage.
There are a couple of cases which lend some guidance to this analysis. In Tidewater Equip. Co., Inc. v. Reliance Ins. Co., 650 F.2d 503 (4th Cir. Md. 1981), a crane suffered damage and a dispute arose over whether the slewing gear could be repaired by repairing the broken tooth, or whether the entire gear had to be replaced. The manufacturer believed that the entire gear assembly had to be replaced and would only warrant the repairs if this was done. In addition, the crane owner's insurer refused to insure the crane unless the repairs met factory specifications which would not be the case if just the broken tooth was replaced.
The court found that the crane was not as valuable or as serviceable as it had been before the loss if it was uninsurable. It found this an important consideration in determining whether an insurer has fulfilled its duty to repair or replace the covered property. Since the policy in question required that the property be put back in substantially the same condition as before the loss, the court held that warranty of the product was part of the value of the property for which the insured had to be compensated.
In Glens Falls Ins. Co. v. Covert, 526 S.W.2d 222 (Tex. App. 1975), 81 vehicle safety stabilizers, which are sealed units that cannot be inspected for internal damage, fell from a storage shelf to the floor. After they fell, it was impossible to determine whether any internal damage occurred. As a result, the manufacturer of the stabilizers withdrew its warranty that the products were free from defects and the insured then decided it could not sell the units without the manufacturer's warranty and so the units lost their merchantability. The policy covered all risks of physical loss or damage, and the court held that since there was no proof of physical loss to property, the loss of warranty was not a covered type of loss.
The scenario presented in this question appears to be more similar to the Tidewater case than the Glens Falls case since the roof did sustain some actual physical loss. Also, since a manufacturer's warranty is often a major consideration in a buying decision by a consumer, it can easily be understood why an insured would consider the loss of a warranty, which was included in the purchase price of the item, to be a direct loss for which it should be compensated when there is a covered cause of loss damaging the property. Under the Tidewater analysis, the loss of the warranty should be taken into consideration as part of the value of the property for which the insured should recover.
Even if the loss of warranty is covered by the policy, the issue of the measure of the insured's recovery remains. It may be possible that the insurer has some recourse other than entirely replacing a repairable roof. The insurer could enter into an agreement with the insured to provide equivalent protection for the balance of the warranty period, although it seems unlikely that many insurers would want to directly become a warrantor. An insurer might be more willing to pay for the additional cost of warranty protection to be provided by the manufacturer or another third party. However, the insured must be convinced that the repair and the substitute warranty will return the damaged property to the same condition it was in prior to loss. Another alternative is for the parties to determine the value of the unexpired warranty period, and for the insurer to pay to the insured that amount in addition to the cost to repair the roof. If none of these possibilities are available or feasible, according to the Tidewater case, the insurer would be required to replace the roof in order to put the insured back in the same position it was in prior to loss.
To see updated information, see PLRB Property Question & Answer Service – Product Warranties – Prop. Q&A 135.
