Retail businesses and their insurance advisors should be aware of a little known exclusion in commercial liability policies called the “inspection exclusion.” In a January 31 decision in a coverage dispute between Home Depot and its insurer, Twin City Fire Ins. Co., a U.S. District Court judge in Los Angeles held that Home Depot had no coverage for a $9 million arbitration award in favor of a customer who was shocked with electricity while handling a rat trap on display for sale at a Home Depot store. The exclusion barred coverage for claims “arising from any failure to make such inspections . . . as the vendor has agreed to make or normally undertakes to make in the usual course of business.” The court found the exclusion applied because the rat trap had been returned be a previous customer, and Home Depot failed to follow its own procedures by placing the trap back on the shelves without first deactivating its electrification feature, which shocked and injured the customer inspecting it.
This exclusion may come as a surprise to many retailers who assume they are covered when the products they sell injure customers. It underscores the importance of commercial policy holders working with their brokers or insurance counsel to understand the scope of the coverage they have, be aware of exclusions and other limitations which may be contrary to their expectations of coverage, and takd steps to negotiate changes to exclusions or other terms which aren’t suitable for the risks of their business.
The case is Home Depot USA, inc. v. Twin City Fire Ins. Co., 2022 U.S. Dist. LEXIS 18369 * | 2022 WL 294744 (C.D. Cal. Jan. 31, 2022).
Our firm advises business policyholders regarding the suitability of their insurance coverages, and represents clients in making and negotiating claims as well as prosecuting coverage and bad faith cases when coverage is denied improperly.
