How One Word in an Insurance Policy Caused a $1,000,000 Loss

Too often, businesses take their insurance policy for granted and simply assume even their most rudimentary claims will be covered.  There are too many court cases to show the folly of this assumption.  And another one was just decided in the Michigan Court of Appeals.

Facts

In Community Garage, Inc. vs Auto-Owners Insurance Company, Community sued Auto-Owners because Auto-Owners would not pay for repairs when Community’s building trusses began to fail, and the roof sagged (but did not fully collapse).

The insurance policy terms would cover repairs caused by an “abrupt collapse”.  An “abrupt collapse” was defined in the insurance policy to mean the “falling down or caving in of a building… and cannot be occupied for its intended purpose.”  More importantly, the policy specifically said that a collapse does not mean a building that is simply “in danger of falling down” or showing signs “of…  cracking, bulging, sagging, bending, leaning…” 

The Court’s Analysis

Before getting to the court’s decision (which you might already know by now), business owners should remember that under Michigan law, if the terms of an insurance policy are ambiguous, it will be interpreted in favor of the business and against the insurer.  Also, if any policy clause that excludes coverage is ambiguous, the insurance company must provide coverage (again, in favor of the business).

The court went through an entire analysis of whether sagging is the same thing as caving (it is not) and also looked at the Merriam-Webster’s Collegiate dictionary to review the terms sag vs. cave.  The Court ultimately ruled for Auto-Owners, simply, because a sagging roof is not the same thing as a caving-in roof.

Lessons Learned

Too often, business owners review insurance policies anticipating only total losses.  They don’t anticipate other scenarios where there might only be a partial damage or loss.  Ironically, in this case, if there had been a full collapse, Community would have been covered, but because there was only partial damage, there was no coverage.  This may seem ironic, but the reality is from an insurance company’s perspective there is more likely to be partial damage to a building than complete destruction. 

Have you reviewed your business insurance coverage and language recently? 

Want more insight as to what questions to ask your insurance agent to make sure you have appropriate business coverage? Download our checklist of 70 business insurance questions to review with your agent.

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