That Liability Policy May Not Cover What You Think It Does

August 20, 2015 | Kristine A. Tidgren

The Iowa Court of Appeals recently issued an opinion demonstrating a sometimes misunderstood feature of an occurrence-based liability policy: Insurance coverage ends when the policy lapses. In other words, if a business owner is covered by a liability policy when it performs faulty work, it may not be covered for damage stemming from that work if the damage occurs after the policy expires. This is an important distinction that impacts both businesses and consumers.

The Iowa case was initiated by an over-the-road truck driver whose truck engine was overhauled by a repair shop. Nine months after the overhaul, the truck suffered engine failure while the driver was traveling across Wyoming. The certified diesel mechanic who examined the failed engine found that the failure resulted from “a loose cam bolt that was not properly torqued at the time of installation or not properly cleaned before installation.”

The truck driver prevailed in his action against the repair shop, but the driver was unable to collect the $34,256 judgment.  Consequently, the driver filed an action to recover the amount of the judgment from the repair shop’s liability insurer. The trial court entered summary judgment in favor of the truck driver, but the insurer appealed. The insurer argued that the policy—which was in effect when the engine overhaul was done—had been cancelled for nonpayment by the time the truck broke down. The insurer asserted that the policy at issue covered only those losses occurring while the policy was in effect.

The Iowa Court of Appeals agreed with the insurer and reversed the trial court’s judgment.

The policy stated that the insurance applied to property damage “only if the property damage occurs during the policy period.” “Property damage” was defined as “physical injury to tangible property,” and an “occurrence” was described as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

The trial court had found that the “physical injury” and the “occurrence” were the “improper engine overhaul and improper torqueing of the cam bolt.” As such, the trial court found that this damage occurred on March 21, 2011, while the policy was still in force.

The Court of Appeals disagreed, explaining that Iowa law distinguishes between faulty workmanship and an “accident.” The court stated that the “accident” that would have been covered by the policy (had it been in effect) occurred in December of 2011, after the policy had expired. As such, the court ruled that there was no coverage and the insurer was not liable to the truck driver.

This case highlights the importance of understanding the meaning of insurance policy terms. This was an occurrence-based policy, under which the date of wrongdoing or injury causing the event was irrelevant. This is a crucial distinction for business owners performing services for clients. Such owners should ensure that they have the coverage they expect, especially if they choose to wind up a business and terminate their liability coverage. While some may assume that they are covered since they had insurance during the time the work was performed, that is usually not the case. To ensure continuous coverage for “accidents” occurring after the policy expires because of work done during the policy period, owners must generally purchase additional coverage. Under a standard tail policy, for example, claims arising after the policy period for work done during the policy period would be covered. Business owners should periodically review their insurance coverage to ensure that their needs are met. This case also reminds consumers to choose service providers wisely. Although this truck driver proved that the repair shop was responsible for the damage, he has no adequate financial remedy.

The case is Sickler v. Auto Owners Ins. Co., No. 14-1636 (Iowa Ct. App. August 19, 2015).