Factory Fire and Sprinkler Water: Proximate Cause Versus Faulty Workmanship
A food-processing company insures its plant and stock for $2,000,000 under a property policy. The policy covers fire and water damage, but excludes 'the cost of repairing, replacing or rectifying defective workmanship'. A subcontractor had installed new electrical wiring in the packing hall. Six months later, a short circuit in that wiring started a fire. The fire was extinguished by the automatic sprinkler system, which discharged water over the hall. Fire damage to the plant is $300,000; water damage to stock and machinery is $450,000; and replacing the defective wiring and related access panels will cost $80,000. The insurer has declined the entire claim, arguing that the loss 'originated from' faulty workmanship. The insured's maintenance contractor had also skipped a scheduled thermographic inspection two months earlier; the policy contains a condition requiring the insured to 'maintain all protective systems in efficient working order'. The deductible is $10,000 per event.
1. Identify the proximate cause of each element of loss and explain whether the faulty-workmanship exclusion defeats the claim for (a) fire damage, (b) water damage and (c) rewiring cost.
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The insurer's 'originated from' argument is too broad. Insurance law asks what is the proximate cause: the dominant, effective cause of the loss, not the earliest event in a chain. For the fire damage, the proximate cause is the fire, an insured peril. The faulty wiring is an antecedent condition; the exclusion is worded to exclude the cost of rectifying defective workmanship, not all consequent damage. For the water damage, the proximate cause is still the fire: the sprinklers discharged because of the fire. The water is not an independent cause. The exclusion does not apply because the loss was not the cost of repairing the wiring. For the $80,000 rewiring and access panels, the claim is for rectifying the defective work itself, so that part is excluded. The deductible applies once to the covered event, not separately to fire and water. The gross covered amount is $300,000 + $450,000 = $750,000; less $10,000 = $740,000; the $80,000 is excluded. Check whether the policy has a separate ensuing-loss clause; it reinforces this result.
2. Does the skipped thermographic inspection give the insurer a defence? Explain the test and the facts that would decide it.
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The maintenance condition is a separate defence, but it is not automatic. First classify the clause: is it a condition precedent to liability, a promissory warranty, or a mere condition? If it is a warranty, breach may discharge the insurer from the date of breach even without a causal link, depending on the jurisdiction and any statutory reform. If it is a condition, the insurer usually must show prejudice or a causal connection between the breach and the loss. The skipped thermographic inspection could have detected overheating or a wiring defect, so the insurer has an argument. But the fire was caused by defective installation, not by the absence of the inspection. The insured should obtain the maintenance contract, the inspection schedule, and evidence of what a thermographic inspection would have revealed. If the inspector attended but missed the defect, the maintenance contractor may also be liable. The insurer cannot rely on the condition if it knew about the skipped inspection and did not object, or if the condition was not incorporated into the policy.
3. State the likely gross payable before any maintenance-condition argument and explain how you would present the claim.
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The covered loss is the fire damage of $300,000 plus the water damage of $450,000, total $750,000. The $80,000 rewiring cost is excluded as rectification of defective workmanship. The per-event deductible of $10,000 is deducted once, giving a gross payable of $740,000 before any reduction for breach of the maintenance condition. Present the claim head by head, with the fire investigator's report, the sprinkler maintenance records, and the electrician's report separating the defective installation from the resulting fire. Do not bundle the rewiring cost into the fire damage, because that invites a blanket denial. Ask the insurer to identify the exact exclusion wording and whether it alleges a breach of condition or warranty. If the insurer relies on the maintenance condition, request its evidence of prejudice and check whether the condition was a condition precedent or a warranty. Reserve the insured's rights to pursue the electrical subcontractor and the maintenance contractor.