Cleanup Cost Included in Covered Loss

January 13, 2011

We insure a pretzel manufacturer. During a recent storm, the insured's building was infested with an army of grasshoppers.

The insurer initially denied the entire claim, identifying the infestation of insects exclusion as the reason for denial. One of my employees pointed to the attached coverage enhancement for food processors, and she was successful in her attempts to convince the insurer to provide coverage for the stock that needed to be discarded because of the infestation of grasshoppers (organism). Unfortunately, the policy holder incurred a large cleanup expense. We argued this expense should be paid, and we referred to the insured's duties in the event of a loss to mitigate the loss. The provision indicates the insured should keep track of these expenses and submit them for consideration of the claim.

Unfortunately, there is a specific exclusion of consequential loss in the enhancement endorsement. I knew this prior to submitting the claim. The exclusion specifically excludes business income and extra expense. The insurer never utilized this exclusion in the reasons for declination (until now).

I asked the adjuster to reconsider the coverage. She took the claim to her supervisors, and they are now utilizing this consequential loss exclusion.

Which provision will prevail?

(a) the provision that excludes consequential loss (insurer's position), or

(b) the provision indicating expenses incurred to prevent further loss to covered

property from a covered loss (contamination from organisms—insects) should be

considered as part of the loss. (Cleanup of grasshoppers to prevent further

damage to covered stock.)

Pennsylvania Subscriber

The cleanup would not be considered a consequential loss but would be part of the covered infestation loss. Since it is not consequential, we do not see anything in the policy that would exclude the costs, so the cleanup costs would also be covered.

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