INHERENT VICE

Inherent Vice – An Insurance Concept

Inherent vice refers to the intrinsic qualities of property or goods that cause them to deteriorate, damage, or destroy themselves without any external force. 

In plain language: Inherent vice is like the natural spoilage of fruits over time. It’s not caused by anyone or anything else — the fruit just goes bad because of its own properties. In insurance, inherent vice refers to a similar kind of natural decay or damage that happens, not because of an accident, but because of what something is made of or how it's made. 

Technical definition: Inherent vice is a property & casualty insurance term referring to losses arising from the natural qualities of the insured object that make it susceptible to damage under normal conditions. It's frequently seen in exclusions section of many property and inland marine policies. 

Inherent vice is like an untamed wild horse in the world of insurance. It's not something you can control or avoid, it's just a part of the property's nature, causing policy headaches for unwitting customers and agents alike. 

TL;DR

Inherent vice is the natural tendency of some property to damage or destroy itself. 

Understanding inherent vice is crucial in claims handling and risk evaluation. 

Common pitfall is assuming every damage or loss is covered, forgetting inherent vice exclusions. 

A quick win for agencies is to adequately explain inherent vice to clients from the get-go. 

What Is Inherent Vice in Insurance?

Diving deeper into the nature of inherent vice, it’s important to understand it as a concept of exclusions. Insurers typically exclude loss or damage caused by an inherent vice as they are not considered fortuitous, and insurance is meant to cover unforeseen or sudden incidents. As such, inherent vices are generally predictable, and their effects anticipated. 

A simple example of inherent vice in insurance is metal rusting. Under normal circumstances, metal tends to oxidize, bringing about rust. A claim for the rusting of metal stored in a warehouse would not be covered under most property insurance policies because rust, being an inherent vice, is not an unexpected event. 

This concept is central to understanding many parts of a property insurance policy and is foundational to the insurer's responsibility. 

Key Related Terms to Know

Exclusions – specific situations or circumstances where the policy won't provide any coverage. 

Perils – potential causes of loss like fire, windstorm, theft, etc. 

Property Casualty Insurance – Insurance that helps protect from potential financial losses caused by damage to your property. 

Risk Assessment – evaluation of the potential risks involved in a projected activity or undertaking. 

Fortuitous Events – unplanned and unexpected events which occur suddenly and cause damage. 

Common Questions About Inherent Vice

Why is understanding inherent vice important for my job as an insurance professional? 

Understanding inherent vice is crucial because it guides the risk assessment process, claims handling, and policy issuance. It provides an opportunity to educate customers better, manage their expectations, and limit misunderstandings that could lead to E&O exposures. For instance, an agent fully aware of the concept will inform a customer that acquiring insurance for silver items that tarnish over time may not cover tarnishing itself, as that falls under inherent vice. 

Can impacts of inherent vice be mitigated? 

Yes, the impacts of inherent vice can often be mitigated. If the inherent vice is known and predictable, steps can be taken to prevent or slow down the damaging process. Using dehumidifiers in storage facilities to prevent rust formation on metal goods is an example. 

How is inherent vice excluded from insurance policies? 

Inherent vice is usually listed directly in the exclusions section of a policy, stating that losses from such are not covered. The language used might differ from insurer to insurer, so it is always good to know your policy. 

Inherent Vice vs. Maintenance Issue

While inherent vice refers to the natural capacity of property for self-destruction, a maintenance issue refers to damages due to lack of proper care or upkeep. 
 

Real Claim Examples Involving Inherent Vice

Scenario 1: A collector decided to store his valuable wine collection in his basement. Over time, the wine bottles spoiled due to improper temperature and humidity. He filed a claim, but it was declined due to the spoilage being considered an inherent vice. 

Scenario 2: A shipping company was transporting several heavy machinery items. On arrival, the machinery was found rusted due to exposure to sea air. The company tried to claim for the damages, however, the claim was rejected as rusting was considered an inherent vice. 

Scenario 3: An amateur artist used low-quality paints for her canvas art. In a few months, the color started fading and cracking. On filing a claim with her insurer, it was rejected due to the fading and cracking attributed to an inherent vice in the low-quality paints used. 

Limitations and Common Mistakes

Assuming everything is covered under insurance policies can lead to disappointments. 

Failure to understand inherent vice and communicate it to the insured can lead to E&O exposure. 

Overlooking common inherent vices while evaluating risks can lead to miscalculations in risk pricing. 

How to Explain Inherent Vice to Clients

Personal Lines client “Imagine having a fruit basket at home. Some fruits like bananas ripen and then rot faster than apples, right? That's because of their nature. The same happens with some properties and insurance calls it inherent vice. Basically, inherent vice means some properties have naturally occurring issues that could lead to damage or loss.” 

Small Business owner “You know how metal rusts over time just from exposure to air and moisture, right? That's an inherent vice. In insurance, we use that term to refer to the natural and inevitable tendency of some goods to deteriorate. It's important for you to understand that damages from these 'natural tendencies' are not covered under standard policies.” 

CFO or Risk Manager “Inherent vice is a term we use in insurance to describe a property's natural potential to cause itself harm or to deteriorate. That damage isn't considered an insurable loss. So, understanding which of your company's properties have inherent vices can help manage your insurance needs better.”