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The Rough Notes Company Inc.



March 27
09:14 2018

The New Bedford Police Department raided and searched a rental property. The raid resulted in the arrest of the drug dealer and the seizing of his stash of drugs and money, but it also resulted in considerable damage to the rental property. Doug, the building owner, filed a claim with Manufacturers and Merchants Mutual Insurance Company for more than $17,000 to pay for repairs. The claim was denied, so Doug headed for the courts.

See below how the courts ruled.

Douglas C. Alton, Jr., (Alton) owned a building in New Bedford that was occupied by a tenant. The New Bedford Police Department obtained a search warrant for the first and second floors of the building. The warrant authorized the police to search for cocaine, implements used in the administration and preparation of controlled substances, currency, records, and receipts used in relation to the distribution, sale, or purchase of cocaine.

The warrant was executed the next day. Police seized cocaine, currency, and miscellaneous documents from the first floor and found nothing on the second floor. Roughly two months later, a second search warrant was executed and contraband was found on the second floor but not the first floor.

While executing the warrants the police caused a total of $17,274 worth of damage to the premises. Alton submitted a claim under his policy with Manufacturers and Merchants Mutual Insurance Company (Merchants). A superior court granted summary judgement in favor of Merchants and Alton appealed

The policy exclusion read:” We will not pay for loss or damage caused directly or indirectly by any of the following. . . “c. Governmental Action: “Seizure or destruction of property by order of governmental authority.”. . . “Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.”

Alton argued that a search warrant did not constitute an order of government authority within the meaning of the policy. He contended that the policy covered damage caused by a tenant’s criminal activity and therefore, would cover the damage caused by police in apprehending the tenant.

The warrants in question instructed the police as follows: “You are therefore commanded within a reasonable time and in no event later than seven days from the issuance of this search warrant to search for the following property….” Merchant’s argued that the damage caused by the police was indirect damage of the government order. The appellate court affirmed the superior court’s ruling that there was no coverage under the policy.

Alton v. Manufacturers & Merchants Mut. Ins. Co., 416 Mass. 611, 624 N.E.2d 545 (1993)

But the police destroyed the owner’s property

All commercial and personal lines property policies contain an exclusion that excludes coverage for the seizure or destruction of property by order of governmental authorities. The only exception is the destruction such authorities use to prevent the spread of a wildfire and that applies only when the type of fire being prevented would have been a covered loss under the policy.

Read the PF&M analysis of the ISO Businessowners Policy Primary exclusions.


  2. Primary Exclusions

The doctrine of concurrent causation holds that a coverage form or policy must pay if a loss to insured property can be attributed to two causes, one excluded and the other covered. By applying this concept, coverage has been found for earth movement, flood, and other events that are specifically excluded. To eliminate this problem, this paragraph makes three very specific statements:

  • The insurance company does not pay for loss or damage caused directly or indirectly by any of the listed causes of loss.
  • Loss or damage is excluded, regardless of any other cause, sequence, or events that contribute to the loss or damage.
  • Loss or damage is excluded even if a large area sustains widespread damage.

This language applies to these nine exclusions.

  1. Ordinance or Law (07 13 change)

Enforcing or complying with any ordinance or law that regulates construction, use, or repair of any property, or that requires tearing down any property is excluded. This exclusion also applies to the cost to remove its debris regardless of whether or not the property has been damaged.

Example: Millie’s Fine Furniture has been in the heart of downtown for as long as anyone can remember. Its frame structure is quite noticeable and distinct from the concrete and brick buildings that surround it. During a night of looting, a Molotov cocktail thrown into the display window ignites both the building and the upholstered furniture in it. Because the fire department cannot respond quickly, the building is 60% damaged. Millie’s family wants to rebuild so the building appears the same as before but a local ordinance requires that all buildings be of concrete or better construction. Because of this exclusion, the family collects only the amount of money needed to restore the building to the original frame construction. It must pay the additional cost of the construction upgrade from its own funds.

Note: BP 04 46–Ordinance or Law Coverage can be written to cover the claim described above.

Related Article: CP 04 05–Ordinance or Law Coverage

  1. Earth Movement (07 13 changes)

Five separate categories of earth movement events are excluded.

(1) Earthquake and any sinking, rising, or shifting of the earth that occurs with the earthquake. The 07 13 edition adds tremors and aftershocks to this list.

(2) Landslide and any sinking, rising, or shifting of the earth that occurs with the landslide

(3) Mine subsidence of man-made mines, whether the mine is operating or not

Note: This is a common problem in some mid-western states. Separate mine subsidence coverage is available in some states and must be offered in certain counties. Legislation enacted in those states details the coverage that must be offered, the price that may be charged, and the way coverage is written. The state laws with respect to mine subsidence coverage on property in Illinois, Indiana, Kentucky, Pennsylvania or West Virginia should be reviewed carefully.

(4) Sinking of the earth and any rising, shifting, erosion, contraction, or expansion of the ground as well as water below the surface of the ground and poor soil conditions. Sinkhole collapse is an exception to this exclusion.

Note: An important exception to the exclusions described above is that coverage applies if fire or explosion occurs due to any of them but for only the loss or damage the fire or explosion causes.

Example: Natural gas lines run beneath Prairie Town’s main street. A slight earthquake occurs and causes comparatively little damage to the primarily frame structures. Unfortunately, the gas lines are not built to withstand such an incident and they crack, resulting in an explosion followed by a fire. The fire destroys the local drugstore, florist, hardware store, and bank. The loss due to the ensuing fire and explosion is covered.

(5) Volcanic eruption, unless it results in fire, breakage of building glass, or volcanic action. Volcanic action is defined as follows:

(a) Airborne volcanic blast or airborne shock waves

(b) Various types of dust, ash, and particulate material emitted

(c) Lava flow

All volcanic activity in (a), (b), and (c) above that takes place within any 168-hour period is considered a single occurrence. (07 13 change)

The costs to remove ash, dust, or particulate matter is excluded unless covered property sustains direct physical loss or damage.

Note: Volcanoes are unpredictable and the damage they cause varies considerably from one to another. Eruptions usually occur over a number of days. All activity within 168 consecutive hours is treated as one occurrence. This is very important to the insured with respect to the deductible. Instead of multiple deductibles due to multiple events, only one deductible applies for any 168-hour period. Volcanic eruption can be covered using BP 10 03–Earthquake.

Related Article: ISO Businessowners Program Available Endorsements and Their Uses

All aspects of this exclusion apply regardless of whether nature or any other force causes the event. (07 13 addition)

Example: Mountaintop Shopping is a strip mall built on the side of a mountain to serve the resort community. A number of unusual rain events cause the land beneath the strip mall to give way. The landslide eventually destroys two stores. Mountaintop Shopping claims that the loss is due to faulty construction and land preparation, not landslide. This important clarifying language makes it explicit that this loss is excluded.
  1. Governmental Action

Coverage does not apply to property a government authority seizes or destroys. Customs seizures, zero tolerance Drug Enforcement Agency (DEA) drug confiscation, or property seized as evidence in a trial that loses value because of the amount of time it is confiscated are examples of this exclusion. However, property the governmental authority damages at the time of a hostile fire to prevent it from spreading is covered.

Example: The Treetop Resort is nestled in a grove of trees near a national park. A fire begins in the park and heads towards town. To create a firebreak, the fire department clears a path that includes the Treetop property. This loss is covered because the fire and its threat are imminent and a civil authority takes the action.
  1. Nuclear Hazard

All nuclear hazards are excluded. This includes nuclear reaction, radiation, or radioactive contamination. However, the damage to covered property that a fire that results from a nuclear hazard is covered.

  1. Utility Services

There is no coverage for loss or damage caused by or that results from failure of power, communication, water, or other utility service to the described premises if the failure originates away from such premises. There is also no coverage if the loss or damage is due to failure of equipment the off premises utility service owns that is on the described premises. Utility service failure includes reduction in supply and insufficient capacity.

Any loss or damage caused by a power surge that would not have occurred except for an event that causes power failure is excluded.

There is a very broad exception to this exclusion. A covered cause of loss may result from power surge or power failure or the failure of any of these utility services may result in a covered cause of loss that causes loss of damage. In that case, coverage applies for only the loss or damage that results. Another exception states that this exclusion does not apply to loss or damage to computers or electronic data.

Communication services also include Internet access service or access to any electronic, cellular, or satellite network. However, it is not limited to just these.

Note: Off-premises power failure coverage can be added using BP 04 56–Utility Services–Direct Damage and
BP 04 57–Utility Services–Time Element. Spoilage coverage can be added using BP 04 15–Spoilage Coverage.

Related Article: ISO Businessowners Program Available Endorsements and Their Uses

  1. War and Military Action

This exclusion lists three specific warlike activities.

  • War. This can be a declared, an undeclared, or a civil war.
  • Military force of a warlike nature. These activities must utilize military personnel or agents of a government or other type of authority. The actions taken to prevent any of these activities are also considered war.
  • Insurrection, rebellion, revolution, and attempts to usurp power. Any government action taken to respond to such actions is also considered war.

Note: This exclusion does not apply to acts of terrorism. Separate terrorism endorsements must be added to exclude such actions.

  1. Water

(1) Flood is excluded. Flood is surface water, tides, tidal water, and waves. Waves include tidal waves and tsunami. Overflow of any body of water is also excluded. A body of water is a natural or man-made river, creek, ocean, or lake. Spray from any of the above, wind-driven water, and storm surge are also excluded.

(2) Mudslide and mudflow occurs when a sudden large volume of water mixes with unstable soil conditions and is excluded.

(3) Coverage does not apply to loss or damage from water that backs up, flows from, or is otherwise discharged from sewers, drains, sumps, or equipment such as sump pumps.

(4) Water saturated ground can create hydrostatic pressure against a building’s surface or subsurface portions. Loss or damage caused by or that results from such water that enters through foundations, walls, floors, paved surfaces, basements, doors, windows, and other building openings is excluded.

(5) Loss or damage due to waterborne material carried by waters described in (1), (3), and (4) above is excluded. Such material moved or carried by mudslides or mudflow described in (2) above is also excluded.

Example: The river was moving fast and picked up trees, docks, and other material. Mavis was thrilled that the flood did not enter her warehouse but was upset because a tree had been pushed against and into her storage building. Because of this exclusion, the damage to the storage barn and also to the items inside the barn is excluded.

ISO adds a paragraph that explains that this entire exclusion applies whether any of the events are caused by an act of nature or otherwise. In order to clarify the term “otherwise,” ISO provides an example that uses the terms “dam,” “seawall,” “levee,” “boundary” or “containment system” and states that any of them failing to contain the water is an “otherwise” type situation. However, it is important to note that using this example format does not limit the exclusion to failure of only those specific items. The goal is to define the term “otherwise” as broadly as possible.

Much like other exclusions, if fire or explosion occurs because of any action of water, coverage applies to the loss or damage the fire or explosion causes. In addition, if a sprinkler leakage loss occurs due to these actions of water, coverage applies to the loss or damage the sprinkler leakage causes.

Note: There is no standard Businessowners Program endorsement that covers flood and related causes of loss. Some insurance company endorsements cover loss or damage caused by backup of sewers and drains and failure of sump pumps to operate correctly. The federally administered National Flood Insurance Program (NFIP) provides limited coverage for eligible property.

Related Articles:

National Flood Insurance Program Standard Policy Coverage Analysis

AAIS Difference in Conditions Form–Property Coverage Part

ISO Difference in Conditions Coverage Form

  1. Certain Computer-Related Losses

The Year 2000 computer scare was followed by exclusions being introduced for similar software problems caused by difficulty with handling dates and time. Under this exclusion, there is no coverage for the failure, malfunction, or inadequacy of any computer, computer application, computer operation system, computer network, microprocessor, or any other computerized part or any other product that depends on computers when caused by an inability to process dates or time. Coverage also does not apply to anything any insured does to correct any of these problems. If a computer’s failure to accept time or date results in a loss due to a specified cause of loss, coverage is available for the resulting damage from that loss.

Example: The computer program that controls the sprinkler system at the Food Warehouse does not recognize the date 02/29. The system automatically activates on 02/29/13 due to the failsafe device inside the program. Because the activation took place at 12:01 a.m., the building’s contents are completely waterlogged when employees arrive for work. This loss is covered because loss or damage caused by or resulting from sprinkler leakage is covered.
  1. i. Fungi, Wet Rot, or Dry Rot

The presence, growth, spread, or any other activity of fungi, wet rot, or dry rot is excluded. However, if a specified cause of loss results from any such activity, the loss or damage the specified cause of loss causes is covered.

This exclusion does not apply when such activity results from either fire or lightning or to the extent that coverage applies under 5. Additional Coverage r. Limited Coverage for Fungi, Wet Rot, or Dry Rot.

Example: A tornado blows the roof off George’s Hardware Store. The top floor is destroyed but damage to the first floor initially appears to be minimal. However, mold is discovered in the interior walls on the first floor two weeks later. The mold damage is not covered because of this exclusion. Coverage is available under 5. Additional Coverage r. Limited Coverage for Fungi, Wet Rot, or Dry Rot, but is limited to $15,000 for each 12-month policy period
  1. Virus or Bacteria

Loss or damage from any type of microorganism that causes or is capable of causing physical illness, distress, or disease is excluded.

Examples of excluded microorganisms are virus or bacterium but they are only examples. This means that this is a far-reaching exclusion because microorganisms are everywhere.

This exclusion does not apply to any of the items described in exclusion i. Fungi, Wet Rot, or Dry Rot above. This is important because those items have some limited coverage under 5. Additional Coverages r. Limited Coverage for Fungi, Wet Rot, or Dry Rot while these microorganisms do not.

This exclusion takes precedence if a microorganism could be excluded under this exclusion or under the pollution exclusion. This means that 5. Additional Coverages h. Pollutant Clean-up and Removal does not apply to damage such an organism causes.

The building owner is the loser

A building owner’s lease is important, but it may be of no use when a drug user occupies it. When the person using the building for illegal activity leaves by choice, eviction or by arrest, the property damage that was the result of that tenant’s use is often not covered. The building owner is often left with uncovered damage and a tenant from whom it cannot collect reimbursement.

Here are two e-marketing articles explaining the consequences to the landlord of meth use by a tenant that you might want to include in a newsletter or as a blog.

Part 1

Insurance is a great fit for homeowners. It also works wonderfully for those who own condos, mobile homes and for those who choose to rent. Insurance works because most policies are designed to handle many sources of accidental loss. More specifically, to handle losses related to regular, residential use. In some instances, insurance doesn’t work at all; such as when a residence is used for a business. It truly doesn’t work when a home is used for an illegal business and there is one such use that is growing at near-epidemic proportions….Meth houses!

No matter the coast, no matter the location; meth homes are a problem. Meth is a popular, highly addictive drug that is also, unfortunately, very profitable. The lure of recreational drugs and big money is resulting in the explosive use of homes as meth labs. Police report that they find meth labs in cities, rural areas, and in suburbs. No matter where they are found; making illegal drugs is a crime and insurance doesn’t provide protection.

This is still a problem for property owners and the insurance industry because these are the parties that are burdened with handling the aftermath. The process of making meth involves the use of materials that are toxic and highly flammable. Many explosions occur while making this drug. Even when done without mishap, the process creates toxic contamination for the living space used as a lab. Occupants of such homes suffer serious illness.

A meth home is considered a localized, environmental hazard. The owners of such properties are required to safely and thoroughly remove meth-related contaminants. The process has to be handled by specialists, it usually takes several treatments and the cost can run into the tens of thousands of dollars. Further, testing and re-testing must be performed to assure a proper job.

Frequently it is banks and property owners who have to find a way to deal with the illegal activity of criminal homeowners and tenants who, having escaped or are imprisoned; don’t care about their meth mess.

See part two of this article on more information on the consequences of meth activity.

Part 2

See part one of this article.

Meth homes are often abandoned and condemned, creating a problem for their respective neighborhoods, including pushing down its market values. They also continue as a magnet for illegal activity and/or can become an attractive nuisance, creating increased chances for injury to local children. They also can create an increase in exposure to thefts.

Meth homes also create a major problem for persons who, unknowingly, buy them. Most states have no laws that require prior meth use to be reported to prospective buyers. Stopping meth manufacturing does not end a problem. Making meth creates fumes and residue that permeates a home’s walls, ceilings, flooring, etc. Furniture is similarly contaminated. Regular cleaning efforts are inadequate in eliminating meth component contamination. Expert remediation is needed to remove the dangers caused by contamination from chemicals such as ether, paint thinner, different acids, even anhydrous ammonia. Without remediation, persons can be seriously sickened while occupying such homes. Problems that could develop include skin rashes, nausea, headaches, serious air passage irritation/burns, and serious lung damage. Prolonged occupation in contaminated homes could even cause death.

Due to the presence of invasive, dangerous chemical residue, proper property cleaning must be done by persons with the correct, special equipment and expertise. Areas used to make meth can be restored, but it involves many steps such as hauling and disposing of contaminated furnishings, cleaning of all surfaces. Interior spaces often have to undergo prolonged exposure to high temperatures (90 degrees of more) for several days. Extensive cleaning may involve partial dismantling and cleaning electrical wiring, plumbing, heating and ventilation systems. Special vacuums may be necessary. Expert testing and monitoring is also necessary. The entire process may easily cost upwards of tens of thousands of dollars.

Often, innocent parties turn to their insurance companies for help, but meth activity is NOT an insurable matter. Unfortunately, desperate for help, property owners frequently sue their insurers, trying to find any viable angle to secure coverage…..and this creates a losing proposition…..for everyone.

If you’re a prospective homebuyer, specifically ask about the prior use of a home and get the seller to document that it was not used as a meth lab. If you are a landlord, be careful who you rent your property to and make sure that you monitor your property’s use. If you have to deal with a meth mess; be sure to contact services with the expertise to clean the mess up right.

Highlighting an exclusion

There are no standard endorsements available to remove the Civil Authority Exclusion. This means that it is a risk that must be carried entirely by the named insured. Your client may believe that between the lease and the insurance policy all risk associated with tenant occupancy has been successfully transferred. A judicious reminder may be helpful so that your client can take loss prevention methods, such as periodic and irregularly timed visits to rental properties.

Here is some wording you could use to set up a time to discuss this important issue with your rental property clients.

Dear [Name]:

For many years, insurance companies have tried to revise and tweak their policies in order to make them easier to understand. Regardless, insurance remains a subject with many special words and meanings. Most policies have separate definition sections that try to explain words and phrases that have special meaning. Still, the wording can be confusing, especially when you’re trying to understand things after a loss.

We at the [agency name] want to make sure that you’re comfortable with the protection you bought through us. If you are not sure about the meaning of wording you read in any of your policies, please contact us by phone, letter or email, and we’ll take the time to clarify things. You may also find it helpful to look at the valuable information we provide at [].

The [agency name] prides itself on making sure that our clients understand their coverage. Please contact us and we’ll show you what we mean.



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