Equipment Breakdown: Accidental Damage or Wear and Tear?

An insured has a HVAC chiller. The insulation on one of the water pipes failed and caused the pipe to rust. A hole eventually developed and water spilled out causing damage to the HVAC. The insured submitted a claim on their equipment breakdown policy, but it was denied.  

Q: “Bursting, cracking or splitting” is a covered peril, but any damage that is caused as a result of “depletion, deterioration, rust, corrosion, erosion, settling or wear and tear” is excluded. Is the carrier correct to deny the insured’s claim?

Response 1: Equipment breakdown is defined as a sudden and accidental mechanical or electrical breakdown. I agree with the adjuster.

Response 2: Sorry but the rust was the cause of the loss.

Response 3: It sounds like your loss was caused by a “gradually developing condition” from “wear and tear.” Even if you could meet the definition of accident, it is still excluded by this clause:

None of the following is an “accident," however caused and without regard to whether such condition or event is normal and expected or unusual and unexpected.  However, if an event as defined under 1.a. above results from any of the following, it will be considered an “accident."

1.         Depletion, deterioration, rust, corrosion, erosion, settling or wear and tear;

2.         Any gradually developing condition;

Response 4: Unless the insulation failed due to an event included in the form’s definition of an “accident,” I agree with the denial. It sounds like depletion or deterioration with rust developing in the chiller. It’s too bad the damage wasn’t spotted earlier.

Response 5: Bursting, cracking or splitting does not include a hole caused by corrosion over time. It is not an accident either. Also, bursting, cracking or splitting suggests an event that happened quickly, while rust is an event that happens over a period of time. The policy expressly states an accident does not include “any gradually developing condition.”

Response 6: I agree with the insurer. Neither "rust" or "any gradually developing condition" qualifies as an "accident." In addition, for an event to be covered as an "accident," the policy requires the event to be fortuitous. For example, bursting, cracking or splitting are fortuitous events, while rust gradually developing to the point where a hole develops is not.

This question was originally submitted by an agent through the VU’s Ask an Expert Service, with responses curated from multiple VU faculty members. Answers to other coverage questions are available on the VU website. If you need help accessing the website, request login information.