The author
COVERAGE CONCERNS
It must be made clear that an inspection is a means available to the insurer for underwriting purposes and not an assumption of the insured's responsibility to maintain safe premises.
By Roy C. McCormick
Commercial property insurance, general liability and workers compensation forms and policies include provisions permitting the insurer to inspect work places, operations, machinery and equipment at reasonable times. These provisions are qualified by statements similar to the following:
"Neither the right to make inspections nor the making thereof nor any report thereon shall constitute an undertaking on behalf of or for the benefit of the insured or others to determine or warrant that such work places, operations or equipment are safe or healthful, or are in compliance with any law, rule or regulation." The right is reserved by insurers for determination of risk acceptability and rate determination.
It must be made clear that an inspection is a means available to the insurer for underwriting purposes and not an assumption of the insured's responsibility to maintain safe premises. Agents, brokers and insurance counselors can underscore the incidental benefits to commercial insurance buyers for whom they arrange coverage, but they should add that an insurer does not certify the safety of the premises in the process. In order to prevent a misunderstanding, the company and/or its inspector should emphasize this whenever it carries out an inspection or makes a report for an insured.
Provisions in property and liability insurance policies and forms, reinforced by a series of major court decisions, make clear that the voluntary inspections that insurers make of commercial property are part of an ongoing underwriting process and do not guarantee that the premises and operations are loss free. Although inspections are of great value to the insured, they must not be construed as an assumption of an insured's responsibility for loss prevention efforts and maintenance of safe conditions.
A 1992 case, identified as Jansen v. Fidelity and Casualty Company of New York, is a leading case in point. The ruling by the New York Court of Appeals followed appeal from the New York Supreme Court, Appellate Division, Third Judicial Department. 165 AD2d, 223, 224. Details may be found at CCH 1992 Fire and Casualty Cases, Par. 3691.
An employee of a construction contractor was injured at a construction site. He sued the contractor's general liability and workers compensation insurer, alleging negligence on the part of the insurer in conducting safety inspections at the work site. He contended that he was injured because conditions were not detected and corrected.
The trial court granted summary judgment to the insurance company. It said that liability could not be imposed on an insurer when the alleged negligence "arises out of the regular safety inspections of the work site conducted by the insurer in an effort to reduce the risk of loss covered by its insurance policy."
On appeal, the injured employee argued that "once the carrier undertook to perform the safety inspections, it must be held liable for conducting a negligent inspection." The court observed this principle to be applicable to "those situations wherein the action taken for the benefit of another and not in the furtherance of the interest of the one who assumes to act." (Matter of James v. State of New York, 90 ADad, 342, 344, affd 60 NY2d 737.)
The appeal court noted that the policy stated that the insurer "had the right but not the obligation to conduct safety inspections of the work site," and concluded, from the circumstances of the case under review, that the inspections were undertaken solely for underwriting reasons. That the insured benefited from an effort by the insurer to minimize its exposure was incidental. The judgment of the trial court was affirmed in favor of the insurance company.
In Schoenwald v. Farmers Cooperative Association of Marion, The South Dakota Supreme Court affirmed a trial court judgment in favor of the insurer and against the estates of three men who were fatally injured in a grain elevator explosion. It was undisputed that the insurer inspected the premises several times a year and made recommendations to the insured relative to plant and employee safety.
The insured formulated and carried out its own program, conducting inspections on a weekly basis, completely apart from the insurance company inspections. The insured understood that the insurer performed its inspections for underwriting and rating purposes. The court said that "merely because the insured would receive a benefit from the insurer's inspections by way of comment or observations does not establish the intent or action to perform a duty of providing a safe working environment on behalf of the insured."
It is advisable that the insured give prompt attention to recommendations of insurance company engineers following inspections, and that the agent or broker discuss their importance and verifycompliance.
Loss control is an essential part of the function of an insurer in providing needed insurance at proper and reasonable rates for commercial and industrial accounts. On the other side of the coin, it is a service of great value to the insurance buyer in reducing the possibility of loss occurrence. Though insurance will compensate for monetary loss, the stress and strain on the business owners in the interim is another matter.
Insurance company inspectors, agents and brokers must stress that such inspections and recommenda-tions are not a substitute for the insured's responsibility for maintaining safe premises and operations, and for complying with laws, rules and regulations. OSHA standards and requirements are of major importance.
Twenty plus years ago, before electronic equipment replaced heavy machinery in the production of Rough Notes magazine, our insurer made the following report after inspection of the premises:
"Fire doors into both the warehouse and the shipping department were blocked open. In order to help ensure that fire doors can close quickly and easily in case of fire, all materials, furniture, equipment or other obstructions should be removed from against the doors, and a clear area maintained on both sides of each door ...
"On several floors, heat detectors were hanging loose. In order to ensure that they are ready for use, all detectors should be tightly and correctly installed ...
"In order to reduce the potential for fires, trash bags of clutter should be removed from the old boiler room."
Needless to say, we complied with the recommendations promptly, practicing what we preach. All of us can profit from the expertise and experience of insurance company inspectors, regardless of our ongoing attention to exposures.
Agencies are well advised to
follow up on loss prevention recommendations made by insurers to their insureds following inspection, emphasizing the importance of compliance while making clear that the insurer does not warrant the premises to be loss free. *
The author
Roy C. McCormick is consulting editor of the Policy, Form & Manual Analysis Service (PF&M) published by Rough Notes.