Our client has a CP 00 10 04 02 covering their leased telephone system. The system, consisting of several components located throughout the building, was only thirty days old when it suffered water damage from a frozen overhead water pipe. The lessor insists that any component exposed to water be replaced, whether it suffered obvious damage or not. The lessor will not honor the warranty/service agreement for any components exposed to water but not replaced. Likewise, the lessor will not honor the agreement for components which are repaired, rather than replaced.

We don't believe the insured is made whole if they lose the warranty/service agreement on their equipment. Whether the insurance company pays to replace the equipment or pays the value of the warranty (which would be difficult to determine), it seems clear to us that they must recognize the value of the warranty in the claim settlement.

Michigan Subscriber

In your insured's case, there is some question whether the telephone components are damaged. The policy covers "direct damage" to property. If that direct damage can be proved, and if the warranty is lost because the manufacturer will not honor the warranty on repaired equipment, then the value of the warranty can be said to be part of the loss. If there is no direct damage to the components exposed to water but not obviously damaged, then there is no coverage. The argument here seems to be with the lessor, and whether it is acting within its rights in voiding a warranty on exposed, but undamaged property.

The insured is caught between two contracts and interests. His "deal" with the insurance company does not mesh with his deal with the telephone equipment manufacturer. We do not know of any insurer willing to replace property only when it might have been damaged and then forego the insurer's option of making repairs rather than replacing.

This premium content is locked for FC&S Coverage Interpretation Subscribers

Enjoy unlimited access to the trusted solution for successful interpretation and analyses of complex insurance policies.

  • Quality content from industry experts with over 60 years insurance experience, combined
  • Customizable alerts of changes in relevant policies and trends
  • Search and navigate Q&As to find answers to your specific questions
  • Filter by article, discussion, analysis and more to find the exact information you’re looking for
  • Continually updated to bring you the latest reports, trending topics, and coverage analysis