Joshua Tumen | Property Insurance Law Observer
In AMAG Pharmaceuticals, Inc. v. American Guarantee and Liability Insurance Company, the United States District Court for the District of Massachusetts held that a loose bolt or fitting that could be remedied simply by tightening it did not constitute “direct physical loss of or damage” to equipment covered under an all-risk property insurance policy.[1]
Background
The insured, a pharmaceutical company that owned the rights to a particular drug, contracted with a third-party supplier to manufacture the drug at their facility. The drug was manufactured in a room with environmental conditions designed to maintain product sterility. The company used particular equipment to produce a “laminar airflow,” meaning that filtered air was blown down from the ceiling and flowed consistently from top to bottom over the equipment. The filtered air was then captured by an air vent in the floor—it was not recirculated in the room. One day, environmental monitoring alarms activated indicating that non-viable particles had been detected in the room. It was later determined that there was a leak from a compressed air line.
The Claim
The insured purchased an all-risk insurance policy, providing coverage for property damage, business interruption, and contingent business interruption, among other covered causes and types of loss at the manufacturing facility. Per the insuring agreement, the policy “insure[d] against direct physical loss of or damage caused by a Covered Cause of Loss to Covered Property.” The policy defined “Covered Cause of Loss” as “[a]ll risks of direct physical loss of or damage from any cause unless excluded.”
The insured submitted a claim under the policy contending that the equipment sustained physical damage through a broken air line. The insurer denied the claim based on its position that the property did not sustain physical loss or damage, as required to trigger coverage. Following the insurer’s denial, the insured commenced litigation.
Analysis
The Court agreed with the insurer’s argument that the insured’s losses were not covered because they were not caused by any “direct physical loss of or damage” to covered property. Specifically, the air leak resolved once a loose bolt was tightened. The Court explained that the policy required “some distinct, demonstrable, physical alteration of the property” and, in this case, the subject property was not altered by the loosened bolt. Rather, “a bolt is designed in function to be loosened and tightened.” Again, no action beyond the tightening of the bolt was necessary to remediate the air leak. There was no damage to the bolt, the quick-connect fitting, or the air line, nor were any of those parts replaced. Simply put, the Court stated that “[a] loose bolt does not constitute ‘direct physical loss of or damage to’ property.”
Conclusion
The threshold issue in determining coverage under an all-risk property policy requires demonstration of direct physical loss of or damage to insured property. AMAG Pharmaceuticals, Inc. serves as a reminder that “all risk” does not equate to coverage for “all losses.” Nonetheless, parties should be mindful of the divergent case law on this issue across the United States, especially in circumstances where policies lack relevant definitions.
[1] This article only focuses on a limited portion of the decision in AMAG Pharmaceuticals, Inc. which also addressed other coverage issues.
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.