Welcome to the Property Damage Liability course. The purpose of this course is to arm you, the insurance adjuster and insurance agent, with the relevant and adequate knowledge on matters pertaining to Property Damage Liability. At the end of this course, you should be capable of understanding the basics of Property Damage Liability.

Kindly note that this course should be read together with the Bodily Injury Liability, and Bodily Injury Liability Insurance Coverage Limits courses since they are significantly inter-related. This will assist you to gain the best understanding of the courses.

Please be guided that the contents of this course should only serve as guidance and an overview of the course. All the materials covering Property Damage Liability cannot be exhaustively covered under the course due to its dynamic nature. You are therefore encouraged to use supplementary materials on the topic to equip yourself further.

The content of the course shall be as hereunder:

  1. Introduction
  2. Property Damage Liability

i.          Physical loss or damage

ii.         Loss of Use

  • The Insurance Services Office (ISO) Personal Auto Policy (PAP) Form
  • Amendments to the ISO’s Personal Auto Policy


When one pays an insurance firm to share the risk of losses with them and other people who pay into the insurance plan, they are providing risk protection. The most important reason to buy insurance is to protect money, health, and assets. Risk is an inevitable aspect of life, and there are three forms of risk that are commonly encountered:

  1. Personal risk involves the loss of income as a result of death, illness, disability, or unemployment.
  2. Property risk covers the loss or damage to property as a result of e.g fire, theft, or storms.
  3. Liability is the danger of losses caused by someone’s negligence or by events that cause injury to others.

Insurance is one of four methods of coping with the danger of financial loss in our life: 

  1. Risk Avoidance that involves not taking action in a situation that could result in a financial loss such as driving in snow;
  2. Risk Reduction which is the action of taking actions to lessen the severity of a loss such as wearing seat belts;
  3. Risk Assumption entailing the insured paying a portion of the loss out of their own pocket via self-insurance and deductibles; and
  4. Risk Transfer where the risk of loss is transferred to a third-party such as an insurance company.

Insurance therefore helps to protect the insured’s income and assets from damage or loss, as well as from personal injury or a legal action. According to the National Association of Insurance Commissioners (NAIC), one of the most widely utilized types of personal insurance is automobile coverage.  When it comes to driving legally in a state, most states demand that one has some form of insurance coverage. There are two fundamental coverage areas in auto insurance: liability and property damage. Auto insurance premium is determined by two things: first, insurance firms evaluate the risk associated with an applicant under underwriting, and second is the rating. The rating is determined by the insurer’s estimation of how much it will cost to assume financial responsibility for the applicant’s possible claim. Most auto insurance policies are divided into three basic categories: bodily injury liability insurance, property damage liability insurance, and uninsured/underinsured motorists coverage.

Liability insurance for bodily injury protects the insured against the claims of other persons who are hurt as a result of an accident in which they were found to be at fault. Their bodily injury claims may include reimbursement for medical expenses, lost wages, and pain and suffering. Property damage liability insurance covers the insured in the event that they cause damage to someone else’s property. This covers not just damage to other vehicles, but also damage to other property, such as walls, fences, and equipment. Uninsured motorists coverage provides direct protection to the policy holder. If they are wounded by a hit-and-run motorist or a driver who does not have auto insurance, this coverage will cover them.

Underinsured automobilist coverage is an additional insurance policy. It protects the insured if they are in an accident involving someone who does not have sufficient insurance of their own. In an accident, the insurance of the at- fault person is supposed to compensate the other injured person. However, the injured party’s underinsured automobilist content would cover the rest, if the at- fault party’s policy has a limit below the cost of the damages. Underinsured coverage is not the same as uninsured content, which covers cases in which the at- fault motorist has no insurance at all. The two types of insurance may however be put together. Some jurisdictions require underinsured automobilist content, but most jurisdictions require uninsured automobilist content.

Collision coverage and comprehensive coverage may both be included in Property damage coverage. In the event that the insured’s vehicle collides with an object such as a tree or another vehicle, collision coverage covers for the resulting physical damage. Obtaining this coverage is entirely elective and is not mandated by law. It is however possible that a loan institution or lessor will require collision insurance. In instances where an older vehicle is involved in an accident in which the cost of fixing the vehicle outweighs its value, rather than repairing the car, insurers will “total” it and give the insured what the car was worth. Insurance for comprehensive coverage covers damage to the insured’s vehicle caused by practically any other source, including fire, severe weather conditions, vandalism, flood, and theft. Broken glass, such as windshield damage, is covered under comprehensive coverage. One is not required to get comprehensive insurance by law.

Property Damage Liability

Property damage has been defined under the Definitions section H of the ISO PAP form“ “Property damage” means physical injury to, destruction of or loss of use of tangible property.”  In order to understand property damage liability as used in policies, we will look into:

  1. Physical loss and damage; and
  2. Loss of use.

Physical loss or damage to insured property is typically required as a precondition for coverage under most property insurance policies. This requirement is easily met in the majority of property damage claims. There will always be a physical change or structural damage to insured property when it is damaged by fire, water, or wind, for instance. When the insured property’s structure, on the other hand, appears to have been unaltered (at least to the naked eye), and yet the insured asserts that the property’s value, usefulness, or functionality has been lost or diminished, the question of whether coverage has been triggered arises. In these types of cases, the requirement of actual physical loss or damage has not been consistently applied by the courts. Using the dictionary definition of “physical” as a guide, some courts have determined that physical loss or damage has occurred when the insured property experience a distinct and demonstrable physical adjustment or transformation.   Other courts, on the other hand, have determined that under certain conditions, the loss of use, functionality or dependability can be considered physical loss or damage even in the absence of any demonstrable structural damage to the insured property or any other change.

According to historical records, the requirement for “physical loss or damage” in property insurance policies dates back to the introduction of all-risk policies in the late 1930s, which was several hundred years after the creation of the first property insurance policies. The first property insurance policies, which were introduced in England in the 17th century, provided coverage against only one peril: fire. Because the majority of structures were constructed primarily of wood at the time, fire was the most common cause of property damage. In those early fire insurance policies, there was no requirement for a physical loss or damage to occur. In addition, there was no need for one because fire would always result in a physical alteration of the insured property.

In the late 1800s, the United States developed standard fire policies.

First developed in New York in 1866, and later adopted by other states, the standard fire policy, provided coverage “against all direct loss or damage by fire.” Years after its inception, the current standard form still provides coverage for “direct loss” caused by fire and lightning. A “physical” loss was not required under the standard fire policy because insured property would always experience a physical change or alteration as a result of the fire or lightning. The standard fire policy served as the foundation for the development of modern property insurance policies. An extended coverage endorsement could initially cover perils other than fire and lightning; this could be windstorm, hail, explosion, riot, civil commotion, aircraft, vehicles, and smoke.  

Additional risks, such as water damage from plumbing and heating systems, rupture or bursting of steam or hot water heating systems, vandalism and malicious mischief, fall of trees, objects falling due to the weight of ice, snow, or sleet, freezing of plumbing and heating systems, collapse, landslide, and glass breakage, could be added later as part of extended coverage. Following that, named peril policies were introduced, which provided coverage for specific perils that had been identified, usually those that were included in the extended coverages. In the insuring clause of neither the extended coverage endorsement nor the early named peril policies was a requirement for “physical loss or damage” to have occurred.  As earlier highlighted, the fact that damage from the extended and named perils would always result in a physical alteration to the insured property meant that it was not necessary.

However, with the introduction of all-risk insurance policies, this was no longer the case. Insurance policies covering “all risks of loss or damage to the insured property” were introduced in the 1920s by marine and inland marine insurers. These policies also covered “all risks and perils of transportation.” This was initially developed by marine and inland marine underwriters in response to a growing demand for more comprehensive coverage against the perils of transportation. Within a short period of time, the stipulation that loss or damage be “physical” began to appear in marine cargo and inland marine insurance policies. Since at least the 1930s, all-risk insuring clauses in marine cargo insurance policies have included a requirement for “physical loss or damage” as a condition of coverage. Since at least the 1940s, the same requirement has been included in all-risk inland marine insurance policies. 

However, neither the courts nor commentators have provided an explanation for why marine underwriters originally included the “physical loss or damage” stipulation. It appears that this requirement was added in order to clarify that there was no coverage for intangible losses, such as loss of market, loss of value, losses due to delay, loss of use, or purely financial losses, such as loss of profit. When property insurers introduced the all-risk policy in the 1950s, they included language from existing marine and inland marine all-risk policies that covered “physical loss or damage” in the insuring agreement.  That language, or language that is very similar to it, is still widely used in commercial property insurance policies today.

The term “physical,” as used in the insuring clause, modifies “loss” and “damage.”  The terms “loss” and “damage” do not exactly have the same meaning. Physical damage to property is only one of the many causes of “physical loss” of property. It is possible for an insured to suffer a physical loss of property as a result of theft without experiencing any actual physical damage to the property itself. Because insurance policies rarely define the term “physical,” courts are frequently forced to consult dictionaries in order to determine the plain and ordinary meaning of the phrase. As defined by dictionaries, the term “physical” refers to things that are “perceived through the senses as opposed to those that are perceived by the mind; tangible or concrete.”

In many cases, the meaning of “physical loss or damage” has been determined by referring to this definition. “Physical loss” is defined as the “loss of something tangible or perceptible on some level” according to the courts in some of these jurisdictions. In other cases, however, the meaning of the phrase “physical loss or damage” has not been determined using a dictionary. In the case of “physical damage,” for example, there is “a widely accepted definition that states that it is “a distinct, demonstrable, and physical alteration” of the structure or appearance of a structure.

Other courts have also been established “Physical loss or damage” strongly points to an initial satisfactory state that was changed by an external event into an unsatisfactory state, for example, the car was not damaged until the bumper was dented when the collision occurred. It appears from the dictionary definition of “physical” as well as these other courts’ expressions of the meaning of “physical” that physical loss or damage requires a demonstrable physical alteration to insured property in order for it to be considered. And, until 1968, no court had ever interpreted the term “physical loss or damage” in a different way.

It was in that year that the Colorado Supreme Court, in Western Fire Insurance Co. v. First Presbyterian Church, applied a broad interpretation to the physical loss or damage requirement when it determined that a church building had suffered physical loss. due to an accumulation of gasoline under and around the church, which rendered it uninhabitable and dangerous. The court determined that the church’s particular “loss of use”—caused by the accumulation of gasoline around and under the church which made the premises uninhabitable and dangerous was equal to a direct physical loss. Hughes v. Potomac Insurance Co., a 1962 California Court of Appeal decision, was the only precedent the Western Fire court relied on in support of its decision. In Hughes v. Potomac Insurance Co., the court determined that a homeowner’s policy covering a “dwelling” was required to respond to a claim that a landslide had deprived the dwelling of subjacent and lateral support.

Although the Western Fire court stated that the insurer in Hughes “made the argument that the insured suffered no direct physical loss,” the insurer did not make such an argument, the insurer in Hughes asserted that the policy only covered the insured’s dwelling and not the land underneath it.  Hughes’s court concluded that to interpret the policy in that manner “would be to render the policy illusory,” and thus rejected the argument. In the absence of a provision specifically limiting coverage in this manner, the Hughes court concluded that the policy should not be interpreted to allow an insurer to deny coverage for a dwelling that had been “rendered completely useless to its owners . . . unless some tangible injury to the physical structure itself could be detected,” This wording which was the basis for the Hughes court’s decision that a “dwelling” includes the land beneath it, was utilized by the court in Western Fire to establish an altogether opposite proposition that  despite any actual physical modification to the church building, there was physical loss or damage.

As will be evidenced, various other courts have enlarged on Western Fire to determine that the loss of use, functioning, or dependability might, under certain circumstances, constitute physical loss or damage even if there is no evident structural damage or other change to the insured property. If physical loss or damage from threats such as fire, water, and wind are on one extreme of the spectrum, pure financial loss or damage is on the other. The courts have unanimously ruled that pure economic or financial losses do not qualify as physical loss or damage under a property insurance policy. For example, in Source Food Technology, Inc. v. United States Fidelity & Guaranty Co., the Eighth Circuit Court of Appeals found that the insurer was not liable for the insured’s additional expenses and business income losses incurred after the United States Department of Agriculture prohibited the importation of beef products from the insured’s Canadian supplier due to the possibility of contamination by “mad cow disease.”

The insured’s claim that the closure of the border caused direct physical loss to its beef goods was dismissed by the court because the beef products were treated as if they were physically infected by mad cow disease. According to the court’s reasoning, this argument rendered the term “physical” completely meaningless. Other courts have likewise determined that there is no coverage for pure financial losses. According to Simon Marketing v. Gulf Insurance Co., a California appellate court ruled that the costs of settling a lawsuit against the insured, as well as the costs of dissolving the insured’s business, did not amount to physical loss or damage. These expenses were as a result of a Simon Marketing employee liable for “seeding” high-value winning “Monopoly” and “Who Wants to Be a Millionaire” game tickets to McDonald’s restaurants across the country channeled $21 million in game-winning tickets to a web of accomplices in return for a payment. This operation resulted in litigation against Simon, Mc Donald contract cancellations, client losses and subsequently the business to.

The court determined that “detrimental economic impact unaccompanied by a distinct, demonstrable, physical alteration of the property” was not covered by a property insurance policy, so there was no compensation. J & J Pumps, Inc. v. Star Insurance Company, where a California federal court determined that the payment of tax penalties and interest paid after one of J & J’s workers failed to pay the company’s taxes did not represent physical loss or damage, is another alike outcome. Under the terms of its commercial property insurance policy, which also covered employee dishonesty coverage, J & J sought restitution for the amounts it had paid out in penalties and interest. Due to “the threshold criterion for recovery under a contract of property insurance is that the covered property has experienced physical loss or damage,” the court determined that the payment of tax fines and interest does not, by itself, qualify as physical loss or damage.

A further decision, in Lissauer v. Fireman’s Fund Insurance Co., found that losses experienced by an investor due to Bernard Madoff’s Ponzi scheme were not “direct physical losses” that may be recovered under a homeowner’s policy.   The court reached the conclusion that Lissauer failed to establish that the account incurred a ‘direct physical loss,’ as needed for coverage under the policy. In a similar vein, courts have determined that a decrease in the value of a property alone does not entail physical loss or damage. In the case of Crestview Country Club, Inc. v. St. Paul Guardian Insurance Co., a federal court in Massachusetts, the court ruled that ruled that where the golf hole’s slope, rating, and character were all altered as a result of the loss of a tree near the hole, the expense of redesigning the hole was not covered.

Due to the fact that the plain meaning of “physical” was held as “material”, the court determined that an intangible loss in value of a golf course as a result of its slope, rating, difficulty, or other characteristics does not fall within this meaning. Attempts by policyholders to collect pure economic or financial losses under a basic property insurance policy have been denied by the courts, as evidenced by the cases discussed above. In almost every instance, courts have decided that these types of losses do not constitute physical loss or damage.

In a claim for insurance coverage when an occurrence creates solely cosmetic or aesthetical alterations to the covered property, with no discernible effect on the insured property’s value, coverage is determined by the exact policy language. If the policy covers physical loss or damage, courts have held that it also covers purely cosmetic damage. This situation developed in two cases in which hail dented a metal roof but did not affect the roof’s ability to function, value, or life expectancy. In the case of Advanced Cable Co., LLC v. Cincinnati Insurance Co., hail dented a commercial building’s metal roof belonging to Advanced Cable, but none of the dents could be seen from the ground, and there was no proof that the roof had been disrupted or that its usefulness reduced.

The subject insurance policy provided coverage for “direct physical loss.” “Loss” was described as “accidental loss or damage,”.  A federal court in Wisconsin decided that the roof had suffered physical damage and physical change. Although the denting was modest, it was “still a tangible alteration to the roof,” as was determined by the trial court. Moreover, the policy did not warrant that the damage be observable from a certain point of view or that it decreases the usable life of the property in order to invoke coverage. The Seventh Circuit upheld the decision, noting that denting alters the physical properties of the roof and, as a result, the physical loss or damage criteria had been met in this case.

In Great Plains Ventures, Inc. v. Liberty Mutual Fire Insurance Co., a federal court in Kansas arrived at the same finding in a case that was factually similar to the aforementioned case. In this case, just as in the Advanced Cable, a hail storm led to indentations on the insured’s roofs, they were purely aesthetical in nature. From the ground, the indentations were not visible and had no impact on the functionality or service life of the roofs. Drawing from the Advanced Cable case, the court also held that the cosmetic hail dents physically change an insured’s property. In Rankin v. USAA Casualty Insurance Co., however, a federal court in Colorado reached a different conclusion in a case where the policy covered against “direct, physical loss,” In this case, there was water leakage that led to increased longitudinal cracks, referred to as “checking,” in the logs of the Rankins’ log home.

It was not debatable that the “checking” was normal and that the logs were structurally sound. The Rankins however maintained that physical loss had nothing to do with financial harm and that they had a right to the cost of demolishing and rebuilding their home with logs containing smaller checks, which they claimed would cost $1.3 million. USAA concurred that the checking was “direct” and “physical,” but it disagreed that it was a “loss,” which it defined as a “financial detriment.  In light of the absence of the “or damage” language in the insurance agreement, the court sided with USAA and determined that there was no coverage because the new and increased checking did not result in any financial harm to the insured.

Basically, whether or not there is coverage for purely cosmetic or aesthetical changes to the insured property that have no determinable effect on the insured property’s value is determined by the language of the policy. In cases where the policy provides coverage for “physical loss or damage,” such as in Advanced Cable and Great Plains, courts have determined that coverage exists. Nevertheless, in cases where the policy insures against “physical loss,” such as in Rankin, there may be no coverage.

From the foregoing, it is clear that over the course of several decades, the definition of “property damage” has changed significantly. For instance, the question of whether diminished value constitutes physical injury and, therefore, property damage is still being discussed. The simple act of attaching a defective product to a non-defective property results in physical injury to the non-defective property to which the defective product has been attached. The answer is contingent on a clear definition of what constitutes “physical injury to tangible property,”. The Eljer Manufacturing case [Eljer Mfg., Inc. v. Liberty Mut. Ins. Co., 972 F.2d 805 (7th Cir. Ill. 1992)] is an example of this. Leakage and water damage had been caused by leaking plumbing systems that had shown signs of defects, made by Eljer and installed in a number of homes.

Whether or not homes with Eljer systems that had not leaked suffered any property damage was the subject question. The Seventh Circuit Court of Appeals, applying Illinois law, concentrated on the drafting history of the insurance policy as well as the purpose of insurance. It discovered that property damage had occurred on installation, partly due to the fact that the homes with the defective plumbing systems had suffered diminished value. In other words, the court determined that the diminished value of the homes with the defective plumbing systems had caused physical harm to the property owners.

The decision of the Seventh Circuit Court was overturned several years later. The Illinois Supreme Court determined that the incorporation of a defective component into the homes did not result in physical injury and, therefore, did not result in property damage. Tangible property does not suffer physical injury if it suffers intangible damage, such as a decrease in value, according to the court (Traveler’s Ins. Co. v. Eljer Mfg., Inc., 757 N.E.2d 481 (Ill. 2001). The Texas Supreme Court held in U.S. Metals, Inc. v. Liberty Mut. Group, Inc., 59Tex. Sup. J. 144, 2015 Tex. LEXIS 1081 (2015) that integration of a defective product did not cause physical injury to tangible property and, therefore, did not constitute property damage, regardless of the fact that the property’s value was diminished. The court cited and relied on the decision on the Illinois Supreme Court case of Traveler’s v. Eljer.

The John Hancock Tower windows, approximately 10,000 windows, each weighing 500 pounds, began falling out of the 790-foot structure while it was still under construction in the early 1970s. As a result, areas adjacent to the structure were sealed off, making it impossible for pedestrians to get in or out of them. A restaurant located in an adjacent building but not inside the tower filed a lawsuit against the contractor and curtain wall subcontractor, asserting property damage in its complain since the falling glass deterred members of the public from entering the restaurant. Despite the fact that there was no physical damage to the restaurant’s property, the restaurant claimed that its property had been rendered useless, and as a result, it had suffered a loss of use of tangible property.

Where a large piece of contractor’s equipment failed on a public street, culminating in the closure of that street, the court observed, the loss of use suffered by the stores owners on that street would be covered as property damage.  Despite the fact that the Hancock Tower case involving the restaurant was a resolution of the duty to defend, the court found coverage for the restaurant’s claim under loss of use of property that did not incur physical injury in Continental Cas. Co v. Gilbane Bldg. Co., 391 Mass. 143 (1984).

 As stated by J&D Towing, LLC v. American Alternative Ins. Corp., 478 S.W.3d 649 (Tex. 2016, “Loss of use damages are often appropriately couched in terms of consequential damages. By design, loss of use damages compensate a property owner for damages that result from “a reasonable period of lost use” of the personal property. The amount of damages may thus be measured according to the particular loss experienced, such as the amount of lost profits, the cost of renting a substitute chattel, or the rental value of the owner’s own chattel.”

According to Rhonda D. Orin, “The Meaning of Loss of Use in the Definition of Property Damage,” Insurance Litigation Reporter, October 1, 1990: “Loss of use occurs whenever there is an interruption of normal use of property. This interruption may be caused by a tangible, physical blockage of access to property. The unifying factor … is that the property in question … cannot be used.”

The inability of electronic equipment to run or function properly has been determined by certain courts to be insufficient to constitute physical loss or damage.  In MRI Healthcare Center of Glendale, Inc. v. State Farm General Insurance Company, a California appeal court determined that an MRI machine that failed to switch on after it had been “ramped down” to make repairs to a rain-damaged roof did not qualify for coverage under the terms of the policy. In order for coverage to apply, some external force must have operated upon the insured property in order to induce a physical change in the condition of the property,” according to the court. The absence of any distinct, observable or physical change of the MRI machine, as well as the failure of the MRI machine to “ramp up” satisfactorily, not constituting physical damage were the reasons cited by the court.

The same decision was reached in the case of AFLAC Inc. v. Chubb & Sons.  The case involved a claim for the costs of changing computer systems from a two-digit to a four-digit date recognition capability in preparation of the Y2K issue. The Georgia Court of Appeals determined that the phrase “direct physical loss or damage” refers to “an actual change in insured property that was in a satisfactory state, caused by an accident or other unforeseen event directly upon the property rendering it unsatisfactory for future use or necessitating repairs be made to make it so. The court reached the conclusion that there was no requisite physical loss or damage, and that there was no actual alteration in the computer systems as a result of an unforeseen incident.

Some courts have however ruled that the loss of use, functionality, or dependability of electronic equipment comprises physical loss or damage in specific circumstances. Wakefern v. Liberty Mutual Fire Insurance one such example where food going bad and business income losses happened in Wakefern’s supermarkets during the August 2003 blackout, which came about as a result of the proper operation of protective relay devices causing the de-energization of transmission lines. Due to the fact that the undefined term “physical damage” was held to be ambiguous, the New Jersey appellate court determined that “the electrical grid was ‘physically damaged’ because, due to a physical incident or series of incidents, the grid and its component generators and transmission lines were physically incapable of performing their essential function of providing electricity.”

In Stack Metallurgical Services Inc. v. Travelers Indemnity Co. of Connecticut, resulted in a similar outcome, the insured’s furnace, which was used to heat treat medical devices, could no longer be used for that purpose, because of a disintegrating lead hammer left behind in the furnace, the furnace became contaminated with lead particles. An Oregon federal court determined that the insured had established the requisite physical loss or damage for its business income claim by determining that “the physical change in the furnace due to the release of lead particles, which prohibited the furnace from being used for its ordinary expected purpose, is fairly characterized as a ‘direct physical loss of or damage to’ the furnace.”

In the case of Ashland Hospital Corp. v. Affiliated FM Insurance Co., the court ruled that the “loss of reliability” of electronic equipment comprised physical loss. When the air conditioning equipment at the hospital failed, the computer equipment used to store medical records was subjected to dangerously high temperatures. Following that, the equipment manufacturer proposed that the exposed equipment be replaced because it could “no longer confirm the long-term reliability” of the equipment. As part of its decision to uphold coverage, the Kentucky federal court determined that “core function and value” of the equipment was to provide the insured hospital with “99.999% guaranteed reliability of critical data” and the equipment’s “value—its insurable

risk—is its reliability.”

As the preceding cases demonstrate, courts have taken two distinct approaches when dealing with claims involving the loss of functionality of electronic devices. When determining that physical loss or damage requires a distinct, demonstrable physical alteration of the equipment, some courts have relied on the traditional definition of the term “physical.” Other courts, on the other hand, have given a broader interpretation to the term “physical,” holding that the loss of use, functionality, or dependability constitutes physical loss or damage.

The loss of use of insured property due to the threat of future damage, lack of access, or a lack of power has been asserted by some insureds as a form of physical loss or damage. In some cases, courts have determined that the loss of use in these conditions does not equate to physical loss or damage. In Phoenix Insurance Company v. Infogroup, Inc, an Iowa federal court determined that the loss of use of insured property because of the threat of flooding did not constitute physical loss or damage under the insurance policy.  According to the dictionary definition of “physical,” the court determined that “the common usage of physical in the context of a loss therefore means the loss of something material or perceptible on some level.” Ultimately, the court determined that a simple loss of use does not comprise physical loss or damage. Even though a loss of use may in some situations comprise a physical loss, the court found that “interpretation of physical loss as requiring only a loss of use stretches” physical” beyond its ordinary meaning and may, in some cases, “render the word “physical” meaningless.”

Furthermore, the court in Roundabout Theatre Co. v. Continental Casualty Co. concluded that physical loss or damage did not constitute loss of use when the insured’s theatre became unreachable due to the city closing a nearby street following the collapse of a building. The appellate court in New York determined that a policy needing “loss of, damage to, or destruction of property” did not cover “loss of use” of property. The appellate court therefore did not agree with the trial court’s decision that the words “loss of” would be redundant to “destruction of” property if it did not mean “loss of use.” The court was of the opinion that the “loss of” language was not redundant since it could relate to theft or misplacement of theatre property.

In a similar vein, another New York appellate court, in Newman Myers Kreines Gross Harris, P.C. v. Great Northern Insurance Co., stated that the insured law firm’s business income losses incurred as a result of Consolidated Edison’s preemptive shut off power of lower Manhattan in anticipation of Superstorm Sandy were not covered by the policy. The loss of use of the insured’s law offices did not entail physical loss or damage, according to the court, due to the fact that the “physical loss or damage” requirement “unambiguously requires some form of actual, physical damage to the insured premises.”

In Pentair, Inc. v. American Guarantee & Liability Insurance Co., the Eighth Circuit Court of Appeals ruled that the inability of the insured’s suppliers to function following a power breakdown did not amount to physical loss or damage. Due to the lack of power, the suppliers were unable to manufacture the products that they were delivering to Pentair. The company sent orders from Taiwan via airfreight to satisfy the needs of its clients over the Christmas season when manufacturing began two weeks later, leading to additional costs. The insured’s assertion that its suppliers’ inability to function following the power outage comprised direct physical loss or damage was rejected by the court, explaining that this would imply that direct physical loss or damage is formed anytime property is unable to be used for its intended purpose.

Damages payable under a commercial general liability (CGL) policy as a result of loss of use are a type of damage that arises as a result of not being able to use property. Within the context of the CGL policy and subject to all applicable exclusions and limitations, covered loss of use results from the deprivation of the use of tangible property, and the coverage applies to pay such damages regardless of whether the tangible property has been physically damaged or not. To put it another way, the meaning of loss of use within the definition of property damage in a CGL policy is damages that are similar in nature to time element damages suffered by a business in a period of disruption. This reasoning is backed up by the time at which loss of use damages are payable as property damage. “All such loss of use shall be deemed to occur at the time of the ‘occurrence’ that caused it “(Commercial General Liability Policy Coverage Form CG 00 01 04 13 © ISO Properties, Inc., 2012.). Under the Continental v. Gilbane case, the CGL policy that was effective at the time of the event causing damages, that is the falling windows, would be liable for all loss of use damages, regardless of the fact that the loss of use damages continued for months after the policy expired.

As highlighted, other types of losses involving property that are not considered loss of use damages may also exist; diminished value or the cost of repair are not generally considered to be loss of use damages. As stated in Wisconsin Pharmacal Co., LLC v. Nebraska Cultures of Calif., Inc., 876 N.W.2d 72 (Wis. 2016). “ However, we previously have stated that “[d]iminution in value—even to the point of worthlessness—is not the same as ‘loss of use’ under the insurance policy, which by its plain language contemplates some sort of loss of use in fact, not a reduction in value.” In Vogel v. Russo, 236 Wis. 2d. 504, 518 (2000), it was noted that ‘In any event, as we have noted above, the diminution in value award in this case was simply an alternate of the cost of repair damages, and did not fundamentally recharacterize the nature of the harm in such a way to trigger coverage under West Bend’s CGL policy.”  The court in New Hampshire Ins. Co. v. Vieira, 930 F.2d 696 (9th Cir. Cal. 1991) was of the view that “Diminution in value and cost of repair are not two separate harms—they are two different ways of measuring the same harm.”

In spite of the fact that diminished value is not generally sufficient to establish physical injury to tangible property, some courts have used diminished value as a measure of damages emanating from a claim for loss of use. In Thee Sombrero, Inc. v. Scottsdale Ins. Co., 28 Cal. App. 5th 729 (2018) at 740, Sombrero was held to have incurred a loss of use of tangible property.   Furthermore, the diminution in value of the property was held a proper measure of the damages for loss of use in this instance. As a result, the mere fact that Sombrero was attempting to recover damages calculated on the basis of diminution in value does not suffice to demonstrate that it was not attempting to hold CES liable for a loss of use of tangible property.

In addition, preventative costs, especially when there is no physical injury to tangible property, are not generally deemed damages as a result of property damage and, as a result, are not typically covered by a commercial general liability insurance policy.

The Insurance Services Office (ISO) Personal Auto Policy (PAP) Form

As highlighted in the Bodily Injury Liability course, we will briefly continue with the ISO PAP form in this class. We will also look into amendments made to it.

On exclusions, let us review the below insuring agreement found in PART A – LIABILITY COVERAGE:

“A. We do not provide Liability Coverage for any “insured”:

1. Who intentionally causes “bodily injury” or “property damage”.

2. For “property damage” to property owned or being transported by that “insured”.

3. For “property damage” to property:

a. Rented to;

b. Used by; or

c. In the care of;

that “insured”.

This Exclusion (A.3.) does not apply to “property damage” to a residence or private garage.

4. For “bodily injury” to an employee of that “insured” during the course of employment. This

Exclusion (A.4.) does not apply to “bodily injury” to a domestic employee unless workers’

compensation benefits are required or available for that domestic employee.

5. For that “insured’s” liability arising out of the ownership or operation of a vehicle while it is

being used as a public or livery conveyance. This Exclusion (A.5.) does not apply to a share-the-expense car pool.

6. While employed or otherwise engaged in the “business” of:

a. Selling;

b. Repairing;

c. Servicing;

d. Storing; or

e. Parking;

vehicles designed for use mainly on public highways. This includes road testing and delivery. This Exclusion (A.6.) does not apply to the ownership, maintenance or use of “your covered auto” by:

a. You;

b. Any “family member”; or

c. Any partner, agent or employee of you or any “family member”…”

A similar exclusion applies to willfully inflicted (nonfortuitous) harm in the homeowner’s policy. a number of exclusions are in place to prevent duplicate coverage from occurring, which would result in over indemnification. In the case of property damage to owned or used property, for example, this should be covered via other property insurance contracts, such as a homeowner’s policy, and is therefore excluded from coverage under the PAP. It should be noted that bodily injury to an employee of the insured who is entitled for workers’ compensation payments is specifically excluded from the homeowners insurance policy.

The risk is higher for someone who uses their vehicle as a taxi service rather than someone who does not. As a result, those who use a vehicle for public transportation or livery are excluded from coverage. Because those employed in the motor industry pose a substantial risk while in their current employment situation, they are also excluded. As a result, you can see why an insurer would prefer not to provide coverage to the mechanic while he or she is test-driving the insured’s vehicle. It is expected that the vehicle industry would have its own automobile insurance policy, with premiums that are tailored to its specific risks.

In certain other jobs, the usage of cars is required, and these vehicles are hazardous regardless of who is driving them. It is difficult to maintain control over large garbage trucks, for example. Insurance companies do not provide liability protection while one is operating a vehicle of this nature. Insurance companies, on the other hand, do not exclude all business-related uses of automobiles. Expressly excluded from the exclusion are private passenger automobiles (for example, those used by traveling salespeople), owned pickups or vans, trailers used in conjunction with any of these vehicles, and any vehicle employed in the operation of a farming or ranching enterprise.

A general contractor sought additional insured coverage under its subcontractor’s policy for a lawsuit involving injury to the subcontractor’s employee. The federal district court found that the policy’s “action over” exclusion, which precluded coverage for bodily injury to an employee of the named insured, when read in combination with the policy’s “separation of insureds” clause, did not preclude additional insured coverage to the general contractor. The U.S. Court of Appeals for the Second Circuit reversed it, it held that the “action over” exclusion precluded coverage because the bodily injury was to an employee of the subcontractor, the named insured. The Second Circuit concluded that the “separation of insureds” clause, which provided that the insurance applied “[s]eparately to each insured,” did not confer coverage to the general contractor because the exclusion applied to “the named insured” rather than “the insured.” [Endurance American Specialty Ins. Co. v. Century Sur. Co., 630 Fed.Appx. 6 (2d Cir. 2015).]

In Allstate Insurance Co. v. Mugavero, 79 N.Y.2d 153 (1992), the Court of Appeals set forth the standard to be applied in determining whether the exclusion for “bodily injury ‘intentionally caused by an insured'” under a standard liability insurance policy applies: The critical question is whether the harm that resulted . . . could have been other than harm ‘intentionally caused’ within the meaning of the policy exclusion.

In Kantrow v. Security Mut. Insurance Co., 49 A.D.3d 818 (2d Dep’t 2008), plaintiffs sought coverage under their homeowner’s policy for a lawsuit arising from claims that their minor son had assaulted a minor. The plaintiffs were sued for negligent failure to properly supervise their minor son. The son was not a defendant in the case. The Second Department held that Security Mutual properly disclaimed coverage based on its policy exclusion for “bodily injury… caused intentionally by or at the direction of any insured.” The court noted that “[i]n the underlying action, all of the injuries allegedly sustained by the infant plaintiff and her mother are alleged to have

resulted solely from the intentional sexual assault of the infant plaintiff by the Kant.

Amendments to the ISO’s Personal Auto Policy

In the Bodily Injury Liability class, we briefly touched on the amendments to the ISO’s Personal Auto Policy whose language we are reviewing. We will look at some of the amendments and opinions on the same as expressed by the Independent Insurance Agents & Brokers of America, Inc, a.k.a BIG I.   Specifically, we will not cover the Revised Endorsements.

On September 1, 2018, the Insurance Services Office (ISO) 30 amendments to its personal auto policy (PAP) program became effective. They are nine changes made to the base PAP form (PP 0 01) as well as 21 endorsements that were either revised, removed, or created. Although ISO lists nine modifications to the PP 00 01; however, what is reported as nine base form modifications is actually a total of ten modifications.

Newly Acquired Auto Wording. When a replacement car was bought, the PAP automatically extended liability, medical payments, and uninsured motorist coverage for the duration of the policy term. There was just one type of coverage that did not continue for the balance of the policy’s duration: physical damage. It was necessary to notify the carrier of the insured’s request for collision and/or other-than-collision coverage, and the purchase of the new vehicle when the new vehicle was acquired. The period within which this notification should be made was dependent on whether the insured’s policy already provided collision and/or other-than-collision coverage: If the PAP provided for the extension of collision and/or other-than-collision coverage to at least one vehicle, the insured had 14 days to notify the carrier of the newly acquired vehicle and the need to be covered. If the PAP did not provide physical damage coverage extension for any vehicles, the insured had just four days to notify the carrier of his or her wish to obtain coverage. Following the adoption of ISO’s new PAP form wording, an insured must tell the insurance carrier of any newly acquired vehicle, whether it is an extra vehicle or a replacement vehicle, within 14 days of the vehicle’s acquisition. There is no automatic coverage provided.

Supplementary Payments. ISO enhanced the coverage amount for loss of earnings due to attendance at hearings from the previous maximum of $200 per day to $250 per day.

Public or Livery Conveyance Exclusion. The public or livery conveyance exclusion endorsement (PP 23 40) was previously used by carriers to specifically exclude any activities or exposures arising from the use of a covered vehicle in the context of a transportation network platform such as Uber or Lyft. Once the transportation network platform app was activated and the vehicle made available for use, coverage was terminated and the vehicle became uninsurable. This exclusionary wording has now been incorporated into the base PAP’s language. Additionally, the ISO addressed concerns that the public or livery conveyance exclusion would be misapplied when a vehicle is utilized for volunteer or charitable reasons. With the new exemption language, it is explicitly stated that the exclusion does not apply when the vehicle is being utilized for volunteer or charitable activities.

Personal Vehicle Sharing Program Exclusion Endorsement (PP 23 16). The ISO withdrew the endorsement and incorporated the exclusionary language into the PP 00 01.  As the name implies, this necessary endorsement specifically eliminates coverage for any vehicle that is both enrolled in and being used in a vehicle sharing program.  When both the enrollment and active use requirements are met, PAP coverage is no longer provided.

Custom Equipment Exclusion Endorsement (PP 13 06). The language from this necessary endorsement was included into the base PAP text, which resulted in the withdrawal of the PP 13 06 endorsement. It is excluded from coverage if the vehicle has custom equipment such as (but not limited to): Special carpeting or insulation; furniture or bars; height-extending roofs; body, engine, exhaust or suspension enhancers; winches, or anti-roll or anti-sway bars; custom grilles, louvers, side pipes, hood scoops or spoilers; custom wheels, tires or spinners; custom chrome, murals, paintwork, decals or other graphics; or caps, covers or bedliners. It was already prohibited from coverage in the previous edition of the PAP when it came to some custom equipment.

Although it was clearly mentioned in the 2005 edition of the policy, a cap, cover, or bedliner that is installed in or on any of the insured’s covered auto that is a pickup does not fall under the exclusion. These things are no longer be permitted. The newly integrated wording provides coverage for the first $1,500 of custom equipment. If the insured requires additional coverage, the insured is obligated to attach the Excess Custom Equipment Coverage (PP 03 18) endorsement. The International Organization for Standardization (ISO) claimed that there is no effect on coverage; nevertheless, this appears to be false. Items that were formerly exempted from the exclusion are now excluded, and whereas no coverage for special equipment previously existed, currently there is up to $1,500. This modification results in both a reduction and an expansion in coverage.

Racing Exclusion.The (ISO) has broadened the racing exclusion to deny coverage for any vehicle that is inside a facility designated for racing in order to participate in any prearranged or organized driver skill training or driver skill event. The aim of the industry to exclude racing-related activities is acceptable; however, this is an inappropriate enlargement of the exclusion. Any activities that take place on or near a racing facility in an attempt to increase driver skill are now excluded under the new rules. As expressed on the Independent Insurance Agents & Brokers of America’s website “I want my 18-year-old daughter to become a better driver (and who doesn’t want their teenagers to be better drivers) leading me to register her for a driver skill training class conducted at Charlotte Motor Speedway (about 30 minutes from my house). With this new wording in effect, I have no coverage under my PAP for any injury or damage she may cause during this training.” The exclusion is termed as being short-sighted and a bad idea.  The writer, Chris Boggs, terms it as a punishment on the insured whereas they are trying to improve their driving skills which would ultimately improve results on the road in ultimate claims payouts. Although the restriction on race training coverage is understood, the restriction on coverage if one was to invest in improving their own or e.g., their children’s driving skills is however not understood.

Exclusion of the Flying Car. There are no feasible flying vehicles on the market at the moment though many people are attempting to create such, but ISO believes that technology and economics will soon or someday allow for the development of flying automobiles. For this reason, the new flying car exclusionary language excludes injury or damage deriving from, connected with or occurring as a result of flying automobiles. Therefore, getting hit by a flying is now excluded. As expressed by the Independent Insurance Agents & Brokers of America, Inc, in reality, there is currently no effect on coverage, but it is possible that there will be a limitation or reduction in coverage in the future. This is a complete exclusion – the vehicle does not have to be in flight at the time of the exclusion; the requirement only applies when the vehicle is designed and capable of flight.

Other Insurance Clarification. As provided in the previous policy language, Coverage Part A,  “However, any insurance we provide for a vehicle you do not own, including any vehicle while used as a temporary substitute for “your covered auto”, shall be excess over any other collectible insurance.” The noted problem with this language was that personal umbrella policies normally declare that they are extra coverage over all other insurance. Due to the fact that two policies say that they are in excess of other policies, the courts were left in a condition of perplexity. In order to clarify the situation, ISO amended the Part A Other Insurance provision to acknowledge the possibility of an umbrella and to declare that the PAP is not an excess policy over a policy that is intended, and is specifically and excess policy. As a result of this modification, there is no change in coverage; rather a clarification of intent.

Transportation Expense Coverage. ISO’s increased the base transportation expenditure limit in Coverage D from the former $20 per day / $600 maximum to $30 per day / $900 maximum. The ISO decided the previous restriction did not correspond with current market conditions. This adjustment has no effect on coverage; it is merely a limit increase.

Duties After a Loss. Under Part E B.3.b. covering duties after an accident or loss, the insured was obligated to submit to as many times as reasonably asked to examination under oath. There was however no express obligation that the insured produce a recorded statement, even if the carrier sought one from him or her. As a result, the insured might have denied such a request without breaking his or her contractual obligations, and such a refusal would not jeopardize coverage.

The ISO amended the language to require the insured to submit to recorded statements as frequently as is reasonably required. According to the ISO, obtaining a recorded statement is less expensive and time consuming than conducting an examination under oath. As a result of this change, the insured is now obligated to perform an additional obligation. This shift raises a number of questions, including: What would constitute reasonable times? Is it possible that this will lead to carriers searching for additional possibilities to investigate misrepresentation or fraud?

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