subject: Other Exclusions - Consequential Loss - Part IV [print this page] This sort of problem frequently arises following a fire in an office complex. More often than not, furniture, carpets and Venetian blinds follow a "theme". Thus, a carpet may be damaged in one part of the building (perhaps either by fire or water damage) but the pattern may no longer be available. Is the assured entitled to have the whole building re-carpeted so as to ensure continuity, or is the carpet which is not physically damaged, a "consequential loss" which is not recoverable under the policy?
First, it probably makes little difference whether consequential loss is excluded or not. Typically, this sort of problem is dealt with by insurers as a matter of common sense and degree. Legally, it is less easy to decide the rights and obligations of the assured and insurers. Probably the best argument that can be put forward by the assured is that an individual piece of carpet within an office block cannot be considered in isolation. It was the intention of the assured, and clearly known to the insurers after inspection of the premises, that there would be continuity of carpeting design.
Therefore, the carpet should be considered as "one piece" of property and if damage to part of it means that it cannot be replaced so as to maintain continuity then the whole must be replaced. At the moment such arguments have not been considered by the courts, perhaps because insurers tend to deal sensibly with their assureds and disputes have been avoided. The Insurance Ombudsman has considered various household policies and his decisions have been based on an arbitrary allowance for replacing property not directly damaged by the perilnormally 50 per cent.
It should be recognised that other jurisdictions, particularly US courts, are less concerned about distinguishing direct from consequential damages. In the case of Stanley v. Onetta Boatworks Inc (DC OR) 303 F Supp. 99, a new fishing vessel was insured under a boat builder's all risks policy. The vessel developed various cracks and faults in its hull, machinery and fittings after it was damaged in a launching accident. As a result of the damage, the owner, who was not specifically insured for business interruption, was required to abandon fishing work. The court held that the policy covered damages for loss of use, despite a provision specifically excluding consequential damages or loss through delay, and despite the fact the policy may have expired prior to the claim. The court suggested that the damages were caused by defects built into the vessel and enhanced by the launching mishap and did not constitute consequential damages, but flowed from the original defect. It is likely that if an English court had been faced with that problem, the result would have been different.
Business interruption losses are frequently covered by an extension to ARPI policies, but, again, there is a requirement of a nexus between the loss of profits and physical loss or damage to the insured property. There must be a physical loss first caused by an unexcluded peril. There must also be some nexus between the business interruption claim and the property damaged.
For example, take a company that owns two affiliated factories, but only one of those factories is specifically insured for property damage. If the insured factory is damaged, the fact that the second factory depends upon the first for parts and will itself lose business is irrelevant unless the second factory is also insured under the ARPI policy.
