A Capehart Scatchard Blog

Damage to Commercial Building Barred by Wear and Tear Exclusion in Insurance Policy

By on April 22, 2016 in Uncategorized with 0 Comments

A common exclusionary clause in a property damage policy is an exclusion for damage or loss caused by “wear and tear.” In Lam Inv. Research, LLC v. Public Serv. Mut. Ins. Co., 2016 U.S. Dist. LEXIS 45116 (D.N.J. April 1, 2016), the District Court of New Jersey interpreted such a clause in the context of claimed damage to a wall in a commercial building. The plaintiff property owner sued its insurer, seeking coverage under the commercial all risks real estate insurance policy issued to the plaintiff for this building.

The building was owned by Lam Investment Research, LLC, which company was owned by Anthony Lam who invests in commercial real estate properties. He bought this building, located in Jersey City, in 2001. The building to the east of his property had been demolished 20 years before he bought the property. The east side wall of his building, which had been intended as an internal wall, became an external wall after the demolition of the adjoining building.

By 2008, the exterior condition of the Lam building had deteriorated. In 2009, Lam purchased an insurance policy from the defendant Public Service Mutual Insurance Company. In late 2009 or 2010, Lam noticed cracks in the brick masonry and missing bricks in the east wall of this building. He obtained a repair proposal from an engineer who concluded that the building showed serious signs of deterioration and that the east wall showed evidence of water seepage and cracks which had recently increased in size due to the penetration of water.

On October 19, 2010, Lam filed a claim with the defendant, giving a date of loss of October 14, 2010.

The defendant insurer also obtained an engineering report which concluded that the damage to the east wall was due to the exposure to the elements. The defendant’s engineer found that the east wall, intended to be an interior wall, had become saturated with water, which damaged the brick as the water froze and expanded. The cracks that resulted allowed more water to seep in and caused further damage to the brick. Wood floor joists were cut, left pocketed into the wall, and not properly sealed. As a result of improper sealing, more water was permitted to seep into the wall. The report concluded that the majority of the distress to the wall was consistent with damage caused by normal wear and tear.

The report did note that some of the damage could have been caused by the demolition of the adjacent building. Further, the engineer stated that, when Mr. Lam bought the property, the majority of the damage could have been present and any additional distress was “likely related to wear and tear due to exposure to the weather and the environment.”

In interpreting this policy, the District Court noted that it was an “all risk” policy, meaning that it covered all losses of “a fortuitous nature, in the absence of fraud or other intentional misconduct of the insured, unless the policy contains a specific provision expressly excluding the loss from coverage.” The Court also found that this policy contained two exclusionary clauses which may bar coverage – the “earth movement” and the “wear and tear” exclusion. The Court noted that exclusionary clauses in an insurance policy are upheld under New Jersey law if they are “specific, plain, clear, prominent, and not contrary to public policy.”

Focusing on the wear and tear exclusion, the Court found that the defendant’s report showed that wear and tear was the efficient proximate cause of the damage to the building. The defendant’s engineer concluded that the damage was ongoing and progressive since the adjoining building was demolished 20 years before Lam bought the building. Over the years, water seeped in and caused damage to the brick.

Lam did not contest this finding, nor could he, because his own consultant reached the same conclusion. His contention was that some unidentified cause arising after 2008 must have been responsible for the damage. Further, he argued that because the defendant insurance company did not perform an inspection when it issued the policy, it should not be permitted to utilize the wear and tear exclusion in the policy.

The District Court rejected these arguments. It found that the uncontradicted engineering evidence showed that the damage was caused by wear and tear over time. The need to repair the wall did not arise from some specific, identified event on October 14, 2009 but, rather, was caused by the deterioration of the wall. The policy clearly excluded all kinds of “wear and tear.” Accordingly, the District Court held that the wear and tear exclusion barred coverage, granted summary judgment to the defendant insurance company, and dismissed the complaint.


About the Author

About the Author:

Ms. Ramos is an Executive Committee Member and Co-Chair of the Litigation Department at Capehart Scatchard, P.A. located in Mount Laurel, New Jersey. She is an experienced litigator with over 25 years experience handling diverse matters. Practice areas include tort defense, business litigation, estate litigation, tort claims and civil rights defense, construction litigation, insurance coverage, employment litigation, shareholder disputes, and general litigation.

For the years 2020 and 2021, Ms. Ramos was selected for inclusion in The Best Lawyers in America© in the practice area of Litigation - Insurance. The attorneys on this list are selected based upon the consensus opinion of leading lawyers about the professional abilities of their colleagues within the same geographical area and legal practice area. A complete description of The Best Lawyers in America© methodology can be viewed via their website at: https://www.bestlawyers.com/methodology.

In 2021, Capehart Scatchard and Ms. Ramos received the “Best Law Firm” ranking in the area of Litigation – Insurance (Metro, Tier 3) published by U.S. News & World Report and Best Lawyers®. Law firms included on the list are recognized for professional excellence with consistently impressive ratings from clients and peers. To be eligible for a ranking, a firm must have at least one attorney who has been included in the current edition of Best Lawyers in America, which recognizes the top five percent of practicing lawyers in the United States. Betsy Ramos (Litigation – Insurance) was recognized for this prestigious award in the 2021 edition. For a description of the “Best Law Firm” selection methodology please visit: https://bestlawfirms.usnews.com/methodology.aspx.

“Best Law Firms” is published by Best Lawyers in partnership with U.S. News & World Report. For a description of the selection methodology please visit: https://bestlawfirms.usnews.com/methodology.aspx.

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