Generally a latent defect is a defect which is not manifest or discoverable by reasonable examination. As seen in the examples above, it frequently occurs in the manufacture of a piece of equipment or machinery or indeed a building where the structure of the property is unsound but hidden. What is the position when the defect, perhaps a crack in the building, is indeed identifiable by a reasonable examination but the assured failed to notice or disclose it? The defect is not hidden or undetectable and therefore does not fall within the exclusion.

In those circumstances, the insurer must argue that the defect should have been noticed by the assured and disclosed upon entering into the contract and that the insurer is therefore able to avoid the contract for material non-disclosure.

What constitutes reasonable examination and who has to make the examination? If the onus is upon the assured then he is caught between “the devil and the deep blue sea”. If, for example, the defect should have been discoverable then he should have disclosed it but if it is latent it is not covered. It can hardly be suggested that the insurer should be required to examine, for example, an engine testing facility before underwriting the risk. In Acme Galvanising Co. Inc. v. Fireman’s Fund Ins. Co. (1990) 1st Dist 221 Cal App 3d 170 a welding defect in the assured’s “kettle” resulted in molten zinc spilling onto surrounding equipment. It was held to be a latent defect because it was not apparent on examination although an expert subsequently was able to decide, after examining an assembly drawing of the kettle, that discovery could have been made by ultrasonic testing.

Can the court use hindsight to determine whether the defect was latent and caused the loss? Perhaps there are two issues:

– the court should not use hindsight to determine whether a risk is insurable; but 
– can use information gathered later to determine whether a particular 
loss was caused by an excluded peril, e.g. latent defect.