Wear and Tear and Mechanical Breakdown Exclusions Under Auto Policies

In my September 2023 column, I wrote about wear and tear exclusions in property policies and how these exclusions are sometimes improperly cited to deny claims. Most property policies have a series of exclusions that apply to wear and tear, rust, corrosion, decay, deterioration, settling, cracking, marring, scratching, etc.

The basis for these types of exclusions is that they largely address damage that occurs over a fairly lengthy period of time and/or involve the normal use of the property. Over time, property wears out or otherwise can suffer damage that is gradual through routine, frequent use. Such losses are expected and largely uninsurable, even on a depreciated basis.

Auto policies typically have similar sets of exclusions. For example, the ISO Personal Auto Policy excludes:

Damage due and confined to:

Although the wording is arranged slightly differently, the ISO Business Auto Policy essentially excludes the same perils. And, as with property policies, these auto physical damage exclusions are sometimes misunderstood and wrongly applied.

So, let’s consider the logic behind something like a mechanical breakdown exclusion and consider some actual claim examples where arguably this type of exclusion was erroneously applied.

For the former consideration, there is no better resource than the International Risk Management Institute (IRMI.com).

Meaning of ‘Mechanical Breakdown’

What does “mechanical breakdown” mean in the context of most auto and property policies? According to IRMI, “Damage to equipment from an external cause is not excluded by the mechanical breakdown exclusion. Instead, the mechanical breakdown exclusion applies only to loss caused by an internal defect in the equipment.”

To support this interpretation, IRMI cites Caldwell v. Transportation Ins. Co., 234 Va. 639, 364 S.E.2d 1 (1988) which opined, “[E]xclusion of losses caused by structural or mechanical breakdown or failure is restricted to losses arising from internal or inherent deficiency or defect, rather than from any external cause.”

One property form example showed a policy where an oversized piece of wood was fed into a sander, causing it to short out and break the roller teeth. This is not internal, “self-inflicted,” mechanical breakdown but rather an external cause covered by the open perils form in question.

An auto policy example was extensive engine damage that resulted from a truck traveling down a bumpy, dusty road, resulting in the engine air filter clips dislodging and dirt entering the engine. Again, the cause of loss was not an internal mechanical breakdown, but rather a non-excluded external cause of loss.

Some years ago, I assisted a New Hampshire agent in reversing a claim denial. A tow truck drove onto a driveway of a business insured under a business owners policy (BOP). The truck’s hydraulic hose blew out, causing hydraulic fluid to spew onto the insured’s building, parking lot, etc. The BOP adjuster denied the claim on two bases, wear and tear or mechanical breakdown and pollution not caused by a “specified cause of loss.”

The wear and tear and mechanical breakdown exclusions were not applicable, as the damage resulted from an external cause and not from any equipment in the control of the insured. And, while not specifically relevant to our discussion here, the pollution exclusion didn’t apply because, arguably, “vehicles” and possibly “explosion” were two “specified causes of loss” that triggered the exception to the pollution exclusion. The BOP adjuster ended up paying the claim and, presumably, subrogating against the tow truck owner.

To conclude this discussion, one of the most common auto policy claim denials I’ve come across over the years involves engine damage that occurs following refueling. For example, this might include water that has contaminated a fuel storage tank, or where gasoline has been pumped into a vehicle powered by diesel fuel, or vice versa. These situations might include some things that are not supposed to be able to occur, though negligence seems to have no creative boundaries.

In one claim submitted to the Independent Insurance Agents of America (IIABA) “Ask an Expert” service several years ago, after refueling, the engine of an agent’s customer’s Lincoln MKZ began to knock until the vehicle stalled and had to be towed to a repair shop. It was determined that a significant amount of water in the gas tank had caused engine damage. The auto policy adjuster’s initial inclination was to deny the claim, citing the wear and tear and the mechanical breakdown exclusions. The agent gave the same argument made at the beginning of this article to dismiss the wear and tear exclusion, citing Black’s Law Dictionary which defined “wear and tear” to mean “deterioration caused by ordinary use.”

Clearly, this was not ordinary use.

Similarly, for the reasons cited at the outset of this article, the agent argued that this was an external cause of loss and not mechanical breakdown as intended by the policy language. The agent also provided evidence of the payment by the carrier of a claim for damage when an insured put gasoline into her new diesel-powered auto.

Finally, less than a year after the aforementioned water damage claim, I was contacted on a consulting basis by an independent agent who was a friend of a direct writer insured. Her husband had recently passed away and she had been driving his diesel pickup truck, a vehicle she wasn’t familiar with. She accidentally put gasoline, instead of diesel fuel, into the tank, resulting in $11,000 in damage.

The mechanical breakdown exclusion in the direct writer’s auto policy was different from that found in ISO and other more-familiar policies in that it elaborated on the exclusion to include “damage resulting from negligent servicing or repair of your covered auto or its equipment” if the damage involved a “major component” of the vehicle such as the engine.

In this case, we’re dealing with an atypical broadened mechanical breakdown exclusion. My argument FOR coverage was that refueling is not, in common use, a form of “service or repair.” Merriam-Webster defines “servicing” as “supplying maintenance or repair” and includes an example of the use of the term in a sentence in the form of, “I need to get my car serviced.”

If you need fuel in your vehicle, would you say to someone, “I’m going to get my car serviced,” or would you say something like, “I’m going to get some gas?”

Servicing, in common usage, typically refers to things like oil changes, tune-ups, perhaps tire rotation, etc. Refueling is just part of the normal and necessary operation of an auto, not some sort of periodic maintenance.

If there is a moral to the issues discussed in this month’s column, it’s once again to RTFP!