Inspection By Insurer Not A Duty Owed To The Insured

Commercial Liability	No Safety Program
Risk Control Inspection	No Duty to Insured

An explosion at a grain elevator facility resulted in the deaths of three men. The state fire marshal's office concluded that the explosion was caused by a faulty bearing in the conveyor belt's electric motor and a significant dust accumulation inside it.

The trial court granted summary judgment to the insurance company covering the grain elevator after the estate of two brothers, who died in the explosion, filed a lawsuit against the insurer, accusing it of negligence in inspecting the property. The appeal focused on whether the insurer was obligated to exercise reasonable care during the inspection.

Throughout the year, the insurer conducted multiple inspections of the facility, with the latest occurring three months prior to the accident. Following each inspection, the insurer offered recommendations to the insured to improve safety for both the plant and its employees.

The insured managed an independent inspection program with weekly inspections. They recognized that the insurer primarily conducted inspections for underwriting and rate setting.

The South Dakota Supreme Court referenced earlier cases where insurance companies were held liable. It stated:

“In each of these cases, …. there were distinctive efforts by the insurance company to go beyond mere inspection for the purpose of determining insurability and premium." There were representations which claimed that insurer safety engineers were active in client safety programs, "and saved lives, limbs, and money." Insurer inspections were emphasized as a means to maintain safe conditions and prevent loss. In some instances, one could argue the insured purchased an inspection service for their direct benefit when purchasing the insurer's policy.

The court determined that the insurer's advice to the insured regarding defects was incidental to its assessment of insurability and rates. "Merely because (the insured) would receive a benefit from (the insurer's) inspections by way of comment or observations on safety problems does not establish the intent or action to perform a duty of providing a safe working environment on behalf of (the insured)." The court further suggested it should encourage the distribution of safety information, "not discourage it by creating a previously nonexisting duty.”

The trial court's decision was upheld in favor of the insurer and against the deceased's estate.

Schoenwald et al., Plaintiffs, Appellants v. Farmers Cooperative Assoc. Of Marion et al., Defendants, Appellees. South Dakota Supreme Court. No. 17287-a-TICE. Sept. 4, 1991. CCH 1991-92 Fire and Casualty Cases, Paragraph 3421.