We are working with the following loss scenario: a rotational molder entrusts covered property (molds used in his business) to a sandblaster for cleaning. The sandblaster cannot adequately clean the mold by sandblasting alone, so moves to the next step, using direct heat (fire) to soften the buildup on the mold so that it can be removed. During the process, the fire warps the mold. The sandblaster's CGL carrier invokes the "care, custody and control" and "your work" exclusions in denying coverage. The rotational molder then makes a claim under his own commercial property policy (with special causes of loss form) and the commercial property carrier invokes the "faulty maintenance" exclusion in denying coverage. Our question is whether the property insurer is correct in applying this exclusion.

Ohio Subscriber

The commercial property policy's exclusions Section 3 is the "concurrent causation" set of exclusions added in the 1980s to avoid insurance recovery under the legally developed theory of "concurrent causation." This is where a loss could be said to have been caused by some non-excluded event acting in conjunction with an excluded event, such as a claim for flood damage where the cause of loss is held to be negligent construction; flood is excluded, but negligent construction was not excluded under special causes of loss forms.

However, the lead-in language to this exclusion section states, "but if loss or damage by a covered cause of loss results, we will pay for that resulting loss or damage." In this case, the damage was done by  a "covered cause of loss" (fire) and therefore, recovery under the policy should be available. The fact that the fire was part of the maintenance procedure is not relevant; the policy calls for coverage where damage by a covered cause of loss results.

We can see the insurer's position, in that traditionally a distinction has been made between "friendly fire" and "hostile fire," with friendly fire (a fire intentionally set which remains in its intended place) not being considered an insured peril (or a "covered cause of loss"). However, the following, taken from the FC&S Bulletins, makes clear that the friendly/hostile fire doctrine has no application to special causes of loss forms:

"The distinction between friendly and hostile fires only applies to insureds that have purchased named perils coverage. Where an open perils policy is involved, the doctrine of 'friendly fire' has no application; coverage is not restricted to named perils, but is instead openly available unless a specific exclusion applies. Since open perils policies do not contain a coverage limitation that would grant coverage only in cases of hostile fires, both types of fires are covered."

Therefore, the friendly fire/hostile fire doctrine having no applicability and the exception to the exclusion being that if damage by a covered cause of loss results there is coverage, this loss as presented should be covered.

This position is bolstered by a change made in the 1995 ISO commercial property policy. The lead-in language to the concurrent causation exclusion has been changed to read: "we will not pay for loss or damage caused by or resulting from any of the following … But if an excluded cause of loss (i.e., faulty maintenance) results in a Covered Cause of Loss, we will pay for the loss or damage caused by that Covered Cause of Loss." Here, the policy requires that the excluded cause of loss result in the covered cause of loss (i.e., maintenance causing a fire) before coverage attaches. We would say that the 1991 language results in coverage for your loss scenario, but not the 1995 policy. Probably, losses such as you describe are the reason for the revision in the policy. In other words, the 1991 clause is not as tightly drafted and has been modified in the 1995 form to avoid recovery in such cases.

For the stated reasons, we believe the loss should be paid.

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