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by José Umbert and Tom Papa

Corrosion exclusions are not interpreted in the same manner on both sides of the Atlantic Ocean. Generally speaking, in the U.K., corrosion exclusions only apply to exclude the claim where the corrosion event was a gradual process, often naturally occurring over a period of time. Sudden events involving corrosion often fall outside the exclusion and are covered.

In the U.S., generally speaking, any corrosion present in the events giving rise to the loss would be sufficient to trigger the exclusion with only the ensuing damage caused by the corrosion falling for coverage subject to the terms and conditions of the policy. 

What follows is a brief review of both legal systems and how the caselaw reveals how the courts from both jurisdictions have generally nuanced these exclusions and shaped coverage outcomes, in ways that may be unexpected depending on where you are located.

English Law:

English courts take a temporal approach, viewing corrosion in two possible ways. One sees corrosion as a gradual, ongoing deterioration process, akin to wear and tear, typically excluded from coverage. The other interpretation occurs when the corrosion itself (not the damage caused by corrosion) occurs suddenly, and often results in corrosion damage being covered, that is the corrosion exclusion does not apply.

Another way to visualize this is that one interpretation requires the corrosion to be truly fortuitous and unexpected and therefore covered. Whereas, for the other, the exclusion is triggered because corrosion is to be expected as part of gradual deterioration. The latter would arise in the ordinary course of use and would be considered general wear and tear. The former occurs from a fortuitous event, and one that is not expected. Caselaw helps visualize this.

Take for example, Burts & Harvey Ltd v Vulcan Boiler and General Insurance Co Ltd (No.1) [1966] 1 Lloyd's Rep. 161. In Burts, the negligent installation of steel tubes to transmit steam, was such that steam was able to escape and mix with other acids resulting in corrosion of the steel pipes themselves.

The judge in Burts determined that a corrosion exclusion only applied to that corrosion which would have been inevitable and therefore not fortuitous. Whereas in that case, the corrosion was a sudden or accidental event and thus fell outside of the exclusion and was covered. This is consistent with the English law approach to gradual deterioration exclusions where inevitable damage is often excluded (See e.g. Leeds Beckett University (formerly Leeds Metropolitan University) v Travelers Insurance Co Ltd [2017] EWHC 558 (TCC)).

Conversely, corrosion to the walls of a reactor (where natural corrosion would occur) would fall within a corrosion exclusion and would not be covered because the corrosion occurred naturally over a period of time. (MDS Inc v Factory Mutual Insurance Co 2021 ONCA 594). Albeit cover may exist for the resulting physical damage caused by corrosion as such damage would be fortuitous and would not fall under the exclusion subject to the terms and condition of the policy.

The approach taken by English courts differs from that generally taken in the U.S.

U.S. Law:

Generally speaking, and subject to the laws of each state, U.S. jurisprudence adopts a sequential event approach, analyzing corrosion as an initially excluded peril albeit one that may trigger covered ensuing perils. Whether the corrosion was naturally occurring or a sudden event is of less importance, rather U.S. courts often differentiate between the excluded corrosion damage and consequent loss from an insured peril, allowing coverage of the latter under “ensuing loss” or “resulting damage” clauses.

This approach has been generally adopted because U.S. courts take a literal approach to the language used in the policy itself, absent a finding of ambiguity. Essentially, if corrosion is excluded, and corrosion occurs, whether naturally or fortuitously, the exclusion is triggered and there is no coverage.

As above, the laws of each state should be checked to ensure consistency, but generally speaking, the existence of corrosion triggers the exclusion regardless of how the corrosion occurred. In such an event, whether the loss was sudden or natural is not important, all that matters was that the loss was caused by corrosion. (See e.g. Wilfredo Nunez et al. v. Merrimack Mutual Fire Insurance Co., No. 2013-129-Appeal, Supreme Court of Rhode Island, (April 17, 2014).

For example, in Resorts International, Inc. v. American Home Assurance Co. 311 So. 2d 806 (Fla. Dist. Ct. App. 1975) the Florida District Court of Appeal found that damage to an insured air conditioning unit that resulted from corrosion was not covered under an all risks boiler and machinery policy which insured any “sudden and accidental breakdown” of the insured equipment. The court found that as it was undisputed that corrosion caused the air conditioning unit to fail, the exclusion of corrosion or erosion of material applied to exclude the claim. An analysis of how the corrosion occurred was not necessary, given the exclusion.

Another example is Central Louisiana Electric Co. v. Westinghouse Electric Corp. 569 So. 2d 120 (La. Ct. App. 1990), aff’d, 579 So. 2d 981 (La. 1991) there the appellate court found the corrosion exclusion was unambiguous and reflected the parties’ clear intent to exclude all coverages relating to damages caused by corrosion. When expert evidence established that corrosion caused the damage (cracks in the turbines) the court held that the damage was not the result of an accident as defined by the policy, and thus the damage was not covered.

The differences between this approach and the English law approach are significant, in the U.S. generally speaking, there is no need to consider whether the loss was inevitable or sudden, the exclusion is triggered regardless.

A good example of this comes from Arkwright–Boston Manufacturers Mutual Insurance Co. v. Wausau Paper Mills Co, 818 F.2d 591, 594–95 (7th Cir.1987) where the plaintiff asserted that the damage to a reactor was caused by a sudden acid attack rather than a gradual wearing away, an argument that would be sufficient for the exclusion to not apply were the case being heard under English law. However, in Arkwright, the court found the corrosion exclusion applied and the speed at which the corrosion took place was not relevant. With the court finding, under Wisconsin law in that example, that it was not a reasonable interpretation of an all-risk policy to limit the corrosion exclusion to inevitable corrosion. In essence, the court rejected the approach taken by English courts. Other states have come to the same conclusion, e.g. under Colorado law, corrosion in an all-risk policy “unambiguously refers to all corrosion, however brought about.” (Adams—Arapahoe Joint School District No. 28–J v. Continental Insurance Co., 891 F.2d 772, 777 (10th Cir.1989).

Moreover, U.S. courts, include other types of corrosion or cracking, e.g. stress corrosion cracking, to all fall within the corrosion exclusion, “we conclude that stress corrosion cracking is a form of corrosion and falls under the policy’s exclusion for corrosion as a matter of law.” City Brewing Co., LLC v. Liberty Mut. Fire Ins. Co., 2013 IL App (1st) 111996-U, ¶ 51.

Conclusion:

Under English law, corrosion is only excluded under the corrosion exclusion if the corrosion was gradual, naturally occurring or part of gradual deterioration. Where the corrosion is sudden and unexpected, and therefore fortuitous, the loss falls outside the exclusion and would be covered.

In the U.S., the sequential event framework means that generally speaking, any loss involving corrosion will fall within the exclusion, whether the corrosion event was sudden or not.

It should be noted that, depending on the policy wording, both jurisdictions sometimes allow coverage for certain types of ensuing damage caused by corrosion, even if the corrosion itself is excluded.  

In summary, while those approaching a corrosion exclusion from an English law standpoint may expect that the corrosion exclusion will not apply if the event was sudden, those across the Atlantic will not be accustomed to such an approach. Careful consideration is needed when approaching corrosion exclusions to ensure that the needs and expectations of the policyholder fit with the type of cover being offered depending on which jurisdiction you are based.

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The opinions expressed are those of the authors and do not necessarily reflect the views of the firm or its clients. This article is for general information purposes and is not intended to be and should not be taken as legal advice.