Coverage Corner

AUTO POLICY WEAR AND TEAR AND MECHANICAL BREAKDOWN CLAIM DENIALS

By Bill Wilson

I sometimes get coverage questions from consumers who find my website or read an article I’ve written. In the past four months, I’ve received two pleas for help from policyholders who had auto comprehensive claims denied based on wear and tear and mechanical breakdown exclusions, both under recent ISO Personal Auto Policy (PAP) language.

The first claim involved damage to a vehicle’s electrical system due to a faulty RV park electrical hookup and was denied based on the mechanical breakdown exclusion. The second claim involved damage to the engine of a vehicle during a documented dust storm and confirmed by a mechanic that was denied by citing both the mechanical breakdown and wear and tear exclusions.

The current ISO PAP excludes [emphasis added]:

Damage due and confined to:

a. Wear and tear;

b. Freezing;

c. Mechanical or electrical breakdown or failure; or

d. Road damage to tires.

Note the “and confined to” language which prefaces the excluded perils. This exclusion does not apply to any ensuing damage that doesn’t directly result from perils like wear and tear and mechanical breakdown. So, what do these perils mean? For example, what is “mechanical breakdown”?

Probably the most notable source of policy language interpretation is the International Risk Management Institute (IRMI). According to IRMI, “Damage to equipment from an external cause is not excluded by the mechanical breakdown exclusion. Instead, the mechanical breakdown exclusion applies only to loss caused by an internal defect in the equipment.”

IRMI cites case law to support this interpretation such as Caldwell v. Transportation Ins. Co., 234 Va. 639, 364 S.E.2d 1 (1988) where the court opined, “[E]xclusion of losses caused by structural or mechanical breakdown or failure is restricted to losses arising from internal or inherent deficiency or defect, rather than from any external cause.”

This interpretation and cited case law support the contention that damage to a vehicle’s engine because of the intake of dust from a storm is covered by the PAP. Similar cases have found coverage for engine damage when refueling a vehicle with the wrong type of fuel or fuel that was contaminated.

On the issue of “wear and tear,” Black’s Law Dictionary defines this term to mean “Deterioration caused by ordinary use.” Wear and tear losses usually take place over a relatively long period of time. Immediate damage to an auto’s electrical system due to a power

surge or otherwise faulty electrical hookup is not normal wear and tear and not subject to this exclusionary language. It’s possible that the engine itself, for example having 200,000 miles on it, has wear and tear, but that doesn’t impact coverage for a relatively sudden external event. Wear and tear, when coverage is provided on an ACV basis, may impact valuation of the damage, but not coverage under these circumstances.

Finally, a moral to this story arises from the fact that two consumers sought me out online for assistance, one of them quite desperate for help due to a financial situation she was in. What they both had in common was that they were insured in the former case by a direct writer and in the latter case by a captive agency insurer. Claim advocacy is something you often get only from a good independent agent, and I made that clear to both parties.

Bill Wilson, CPCU, ARM, AIM, AAM is the founder and CEO of InsuranceCommentary.com and the author of six books, including the Amazon 4.8 star “When Words Collide…Resolving Insurance Coverage and Claims Disputes” which BookAuthority ranks as the #1 insurance book of all time. He can be reached at Bill@InsuranceCommentary.com.