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Loss of property use does not mean lost coverage.

Scenario 1: The circus has come to town and is heralding its arrival with a parade down Main Street. Shopowner there are set to enjoy a day of brisk business when suddenly one of the elephants in the parade collapses blocking entry to an ice cream store. Does the circus have liability insurance coverage for the store's claim of lost profits? The answer is yes.

Scenario 2: A contractor repairing a road damages a gas main, requiring that the gas be shut off. Because of the service interruption, a plant must temporarily close. Does the contractor have liability coverage for the plant's claim for downtime? The answer again is yes.

Both these scenarios raise the question, What constitutes property damage under third party commercial and comprehensive general liability policies? Under standard form policies, property damage includes actual, physical injury to property. For instance, there would be property damage if the elephant collapsed onto the store and destroyed the building. Similarly, property damage would apply if the contractor accidentally burrowed into the foundation of the plant, causing the building to crumble. However, the difficult question is whether property damage exists without physical injury to property, such as through the loss of property use. As the preceding examples clearly illustrate, loss of use constitutes property damage.

Loss of use occurs whenever the customary use of property is interrupted. This interruption may be caused by a tangible, physical blockage of access to the property which prevents it from being used or by other events such as cessation of operations due to damage in or around the property. The unifying factor in these cases is that the property in question is physically intact but cannot be used. The inclusion of loss of use in the definition of property damage broadens the coverage amount available under liability policies. As such, the term should be part of every risk manager's vocabulary.

The 1966 Policy

The concept that loss of property use falls within the definition of property damage appears in the 1966 standard form CGL policy It defines property damage as injury to or destruction of tangible property and does not refer to loss of use. However, the drafting history of this definition shows that it was intended to include loss of use. The policy drafters, it seems, determined that a direct reference was unnecessary.

An early draft of the definition made physical injury a requirement of property damage, thus eliminating loss of use as property damage. In 1961 a committee of policy drafters, the joint Forms Committee to the Rating Committees of the National and Mutual Bureaus, proposed defining property damage as physical injury to or destruction of tangible property. The committee abandoned this proposal because by requiring physical injury, it prevented loss of use without physical injury from constituting property damage. To clarify that loss of use without physical injury constitutes property damage, the committee deleted the word "physical" from the proposed definition. In approving this deletion, the committee explained that "the intent is clarified that the injury or destruction must be to tangible property but such property need not be physically damaged, e.g. the damages sustained by the closing down of a building would be within the definition."

In 1966 William Obrist, assistant branch manager of the General Accident Group, an insurer now known as General Accident Insurance Co., analyzed the new policy form. "The new definition omits any requirement of physical injury as a prerequisite for coverage," he wrote. "The National Bureau states that the policy will cover the insured's legal liability if no specific exclusion applies even though the tangible property is not physically damaged but is made useless by the act of an insured. An example would be the breaking down of a large piece of contractor's equipment on a public street in such a manner that it must be closed off for a period of time and the public has limited or no access to the stores located in the block affected."

Although a direct reference to loss of use was deemed unnecessary in the property damage definition, the drafters considered whether the term needed inclusion in the definition of damages. The inquiry was appropriate because the drafters recognized that loss of use has two separate insurance coverage meanings. On one hand, loss of use constitutes property damage which can trigger coverage without physical injury to tangible property. Conversely, it is a form of damages that may be collected when insurance coverage exists.

The drafters decided that a direct reference to loss of use was necessary in the definition of damages. Accordingly, the 1966 standard form policy defines damages as including "damages for loss of use of property resulting from property damage." By including loss of use in the definition of damages, however, the drafters confused whether loss of use also constituted property damage. The confusion arose because loss of use was included in the definition of damages but not in the definition of property damage. Despite the unspecified definition, most courts and commentators understood that loss of use constituted property damage. However, other courts and commentators were confused by the definition and erroneously concluded that loss of use did not also constitute property damage. Some commentators even argued that the policy drafters intended loss of use to be a form of damages only, and not of property damage.

The 1973 Policy

Recognizing that confusion existed, the insurance industry revised the CGL policy in 1973 and clarified the property damage definition. The 1973 policy defined property damage as "physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom, or loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period."

Unlike the 1966 definition of property damage, this definition specifically referred to loss of use. Under the first part of this definition, coverage would not attach unless the property in question was physically injured or destroyed. However, under the second part of the definition, coverage would attach when there was loss of use of property even without physical injury or destruction.

In a 1974 analysis of the 1973 policy revisions, the Defense Research Institute gave two illustrations of loss of use coverage under the second part of the 1973 definition. "If an insured contractor repairing roads damages a gas main, requiring that gas be shut off, and if a plant served by the lateral from the gas main must temporarily shut down, the loss of use claim would be covered even though none of the plant's tangible property was damaged," it wrote. "In addition, if the insured's crane buckles and blocks entrance to a building, the claim for loss of use of the building would be covered." These examples are similar to those chosen by the 1966 drafters to illustrate the intent of their policy. They also confirm that the later revisions merely clarified, and did not change, the meaning of the 1966 policy.

The 1973 revision also eliminated and left undefined the 1966 policy definition of damages. According to the Fire, Casualty & Surety Bulletins, the definition of damages was no longer needed because it was incorporated into other sections of the revised policy. For example, the reference in the 1966 policy to loss of use of property resulting from property damage was incorporated into the first subsection of the revised property damage definition. That subsection included the language "the loss of use thereof resulting therefrom." Due to this revision, loss of use in the first subsection actually refers to the consequential damages which may result from physical injury to or destruction of tangible property.

The drafting history of the 1973 definition of property damage is an interesting argument as to why the reference to loss of use in the damages definition was transferred to the property damage definition. The argument is that the reference was transferred to make it clear that when loss of use results from physical injury, it cannot trigger coverage under the second subsection of the property damage definition. Specifically, loss of use resulting from physical injury cannot trigger coverage under the second subsection even if it extends beyond the policy period in which the injury occurred. The words "including the loss of use thereof resulting therefrom" clarified that when loss of use results from physical injury, such loss of use falls only under the scope of the first subsection.

The history of the 1973 property damage definition supports this argument. The joint Conference Subcommittee originally proposed amending the 1966 definition to read "property damage means physical injury to or destruction of or loss of use of tangible property." The General Liability Governing Committee approved this proposed definition, citing that it would clarify the 1966 intent to include loss of use as property damage. The Joint Forms Committee, however, refined the proposed definition further, explaining that additional work would clarify which policy period was triggered when loss of use resulting from physical injury extends over more than one period. The committee stated: "If a building is physically injured in policy A and has resultant loss of use extending over policy A and later policy B, all of the damages would be covered under policy A."

As explained in 1970 by Robert Cook, then assistant general attorney at Liberty Mutual Insurance Co., "In the new property damage definition, we divide the concept into two parts: the first, physical injury along with all resulting loss of use; the second, pure loss of use of tangible property which has not been physically injured. Then, as to the first category-where there is physical injury-we telescope all resulting loss of use back to the time of the physical injury." The same result is achieved in the second subsection due to the requirement that loss of use must be caused by an occurrence during the policy period, unless the physical injury or the occurrence was continuous. In such a case, each applicable policy during the continuous injury or occurrence should pay for loss of use.

The 1986 Policy

In 1986 the standard form CGL was revised again. The new form defines property damage as "physical injury to tangible property, including all resulting loss of use of that property; or loss of use of tangible property that is not physically injured." It is similar to the 1973 definition, the most notable difference being the elimination from both subsections of any reference to occurrences, or damage that occurred, during the policy period. These provisions have not been eliminated from the policy. They have been moved instead to the insuring agreement, which now reads: "This insurance applies only to ... property damage which occurs during the policy period. The property damage must be caused by an occurrence. ... Property damage that is loss of use of tangible property that is not physically injured shall be deemed to occur at the time of the occurrence that caused it."

The drafting history indicates that this change was made partly to avoid circular language that existed in the 1973 policy. For example, the second subsection of the 1973 property damage definition addressed loss of use "resulting from an occurrence." The occurrence definition, however, stated that an occurrence "results in ... property damage." To avoid ambiguity, the Ad Hoc Committee on Special Comprehensive Rules and Forms recommended in 1978 that all references to occurrence be deleted from the definition. Despite such changes, the basic interpretation of the 1986 definition is likely to be the same as the 1973 definition.

Loss of Use Exclusion

Attention should be paid to a particular exclusion in the standard form 1973 policy known as the loss of use, or business risk, exclusion which tracks the language of the second subsection of the 1973 definition of property damage. The exclusion bars coverage for loss of use of tangible property which has not been physically injured or destroyed resulting from a delay in or lack of performance by or on behalf of the named insured of any contract or agreement, and/or the failure of the named insured's products or work performed by or on behalf of the named insured to meet the level of performance quality, fitness or durability warranted or represented by the named insured." However, the exclusion does not apply to loss of use of other tangible property resulting from the "sudden and accidental physical injury to destruction of the named insured's products or work performed by or on behalf of the named insured after such products or work have been put to work by any person or organization other than an insured."

The exclusion applies only when coverage is based on loss of use under the second subsection of the property damage definition and is restricted to loss of use of non-damaged property due to delayed performance or non-performance of a contract, or unsatisfactory products or work. Drafters of this language offered examples of how to apply this exclusion.

In one case the drafters describe an insured fuel dealer who fails to deliver oil to an apartment building, which forces the occupants to be evacuated. Neither the loss of rent nor the cost of relocating the tenants would be covered. However, if due to the non-delivery of oil, the water pipes freeze and burst, the cost of repair as well as the loss of use would be covered. Another case involves an insured that buys and installs a boiler in a manufacturing plant. The boiler fails to heat a quantity of water to the specified temperature, and the plant's capacity is thereby reduced. There would be no coverage for the loss. However, if the boiler suddenly and accidentally breaks down or explodes without physically damaging other property, the loss of use of the plant would be covered.

Revising the Exclusion

In practical terms, the exclusion was difficult to understand and apply, so it was revised in 1986 to exclude "property damage to impaired property or property that has not been physically injured, arising out of a defect, deficiency, inadequacy or dangerous condition in your product or your work; or a delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms." Further, the exclusion "does not apply to the loss of use of other property arising out of sudden and accidental physical injury to your product or your work after it has been put to its intended use."

Although the history underlying standard policy language is complicated, policyholders should not be deterred from pursuing insurance coverage for loss of use. Knowing that loss of use without physical injury constitutes property damage is crucial in collecting insurance for damages because of property damage.
COPYRIGHT 1991 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Author:Orin, Rhonda D.
Publication:Risk Management
Date:Jan 1, 1991
Words:2462
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