Determine Whether Property Damage Occurred
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A first party property policy does not insure property: it insures a person, partnership, corporation or other entity against the risk of loss of the property. Before an insured can make a claim for indemnity under a policy of first party property insurance the insured must prove that there was damage to property the risk of loss of which was insured by the policy. The obligation imposed on the insured by the policy is often relatively easy to fulfill.
For example, in the case of a fire the charred building need only be shown to the insurer. Other situations may not be as easy to prove. Is a building overhanging a newly created cliff damaged? Has a church that is permeated with a gasoline odor sustained property damage? Was missing property stolen? Has a building showing signs it may collapse, subject to an insured peril called “collapse?”
Often, an insurer needs the wisdom of Solomon to reach a correct and fair result. The first party property adjuster is charged with the duty of helping the insured establish the existence or nonexistence of property damage due to a risk of loss insured against and not excluded and work to keep all of the promises made by the insurance policy.
When a first party property policy insures against the risk of physical loss to certain real or personal property, whether the policy is a named peril, all risk, special risk, or direct risk of physical loss policy, the insured must first prove there is damage to the property. An insured may also make claim for loss of use of the property that is the subject of the insurance.
The Insured can retain the property and sustain a constructive loss of use by denial of access or danger of imminent destruction. In Hughes v. Potomac Insurance Co., 199 Cal. App. 2d 239 (1962), the court found coverage after the land next to the house slid away causing the undamaged house to overhang a cliff. The California Court of Appeal found that damage to a structure existed if it was not a safe place for people to live even though all the walls stood and the roof kept out the rain.
While a loss of use may, in some cases, entail a physical loss, “loss of use” and “physical loss or damage” are not synonymous. Indeed, interpretation of physical loss as requiring only loss of use stretches “physical” beyond its ordinary meaning and may, in some cases “render the word ‘physical’ meaningless.” In Source Food Tech., Inc. v. U.S. Fidelity and Guar. Co., 465 F.3d 834, 835 (8th Cir.2006) the court found no coverage under a policy covering “direct physical loss to property” when property was meat which was not allowed to cross the border into the United States and was thus treated as unusable but in fact suffered no spoilage or contamination.
The Covid 19 Pandemic caused serious litigation on the issue of what is physical loss or damage and how a limitation in a policy of insurance defeats attempts to obtain coverage for loss of use of property and interruption of business caused by orders of state authorities.
Oral Surgeons, P.C., sued its insurers for loss of earnings. Oral Surgeons offers oral and maxillofacial surgery services at its four offices in the Des Moines, Iowa, area. Oral Surgeons stopped performing non-emergency procedures in late March 2020, after the governor of Iowa declared a state of emergency and imposed restrictions on dental practices because of the COVID-19 pandemic. Oral Surgeons resumed procedures in May 2020 as the restrictions were lifted, adhering to guidance from the Iowa Dental Board. The insurer refused to pay Oral Surgeons sued.
In Oral Surgeons, P.C. v. The Cincinnati Insurance Company, The Restaurant Law Center Amicus on Behalf of Appellant(s), American Property Casualty Insurance Association; National Association of Mutual Insurance Companies Amici, No. 20-3211, United States Court of Appeals for the Eighth Circuit (July 2, 2021) the Eighth Circuit was asked by Oral Surgeons and some Amici to find the loss of use of its offices was physical loss and Oral Surgeons were entitled to business interruption benefits.
Oral Surgeons submitted a claim to The Cincinnati Insurance Company (Cincinnati) for losses it suffered as a result of the suspension of non-emergency procedures. The policy insured Oral Surgeons against lost business income and certain extra expense sustained due to the suspension of operations “caused by direct ‘loss’ to property.” The policy defined “loss” as “accidental physical loss or accidental physical damage.”
Cincinnati responded that the policy did not afford coverage because there was no direct physical loss or physical damage to Oral Surgeons’ property. Oral Surgeons sued. The district court granted Cincinnati’s motion to dismiss, concluding that Oral Surgeons was not entitled to declaratory judgment.
Oral Surgeons’ appeal alleged that the COVID-19 pandemic and the related government-imposed restrictions on performing non-emergency dental procedures constituted a “direct ‘loss’ to property” because Oral Surgeons was unable to fully use its offices. Oral Surgeons argued that the policy’s disjunctive definition of “loss” as “physical loss” or “physical damage” created an ambiguity that must be construed against Cincinnati. To give the terms separate meanings, Oral Surgeons suggests defining physical loss to include “lost operations or inability to use the business” and defining physical damage as a physical alteration to property.
An appellate court must construe the policy to give effect to the intent of the parties. Intent is determined by the language of the policy itself, unless there is ambiguity. Ambiguity exists only when policy language is subject to two reasonable interpretations. Generally speaking, the plain meaning of the insurance contract prevails.
The Cincinnati policy clearly required direct “physical loss” or “physical damage” to trigger business interruption and extra expense coverage. Accordingly, there must be some physicality to the loss or damage of property. Oral Surgeons needed to prove, therefore, that a physical alteration, physical contamination, or physical destruction of its property brought about a loss.
The common usage of “physical” in the context of a loss therefore means the loss of something material or perceptible on some level. The policy cannot reasonably be interpreted to cover mere loss of use when the insured’s property has suffered no physical loss or damage. The Eighth Circuit refused to find “loss of use” and “physical loss or damage” synonymous. Rather, they are opposites.
The unambiguous requirement that the loss or damage be physical in nature accords with the policy’s coverage of lost business income and incurred extra expense from the date of the physical damage to the insured’s property until the insured restores the damaged property to use. The “period of restoration” begins at the time of “loss” and ends on the earlier of:
- The date when the property at the “premises” should be repaired, rebuilt or replaced with reasonable speed and similar quality; or
- The date when business is resumed at a new permanent location.
Property that has suffered physical loss or physical damage requires restoration. That the policy provides coverage until property “should be repaired, rebuilt or replaced” or until business resumes elsewhere assumes physical alteration of the property, not mere loss of use. When the only reason the property was not used was an order of a governmental agency is not a physical loss, or physical damage. In fact, the property where Oral Surgeons practiced was unchanged during the entire time they could not perform Oral Surgery.
The complaint pleaded generally that Oral Surgeons suspended non-emergency procedures due to the COVID-19 pandemic and the related government-imposed restrictions. The complaint thus alleged no facts to show that it had suspended activities due to direct “accidental physical loss or accidental physical damage, regardless of the precise definitions of the terms “loss” or “damage.”
Since the policy clearly did not provide coverage for Oral Surgeon ’s partial loss of use of its offices, absent a showing of direct physical loss or physical damage. Where no ambiguity exists, an appellate court will not write a new policy to impose liability on the insurer.
There is no question that the orders closing businesses due to fear of spreading Covid-19 caused damage – a loss of business income – to Oral Surgeons and all other businesses who were forced to close down by order of the state or some entity. That order did not damage the property that was the subject of the insurance and there was no need to restore it since once the order was pulled the business of Oral Surgeons was able to begin immediately. No insurance policy insures against every possible loss. The loss claimed by Oral Surgeons was one for which no insurance benefits were available.
When a residence contains walls that were constructed using sheets of Chinese drywall that, over time, released sulfuric gas into the Residence it was found to have incurred property damage even though the walls remained intact. (Travco Ins. Co. v. Ward, 715 F.Supp.2d 699 (E.D. Va. 2010))
Other cases have likewise accepted the view that “damage” includes loss of function or value including a loss of power to the insured’s premises. (Dundee Mut. Ins. Co. v. Marifjeren, 1998 ND 222, 587 N.W.2d 191, Gen. Mills, Inc. v. Gold Medal Ins. Co., 622 N.W.2d 147, (Minn.Ct.App.2001); Pepsico, Inc. v. Winterthur Int’l Am. Ins. Co., 24 A.D.3d 743, 806 N.Y.S.2d 709 (2005); Wakefern Food Corp v. Liberty Mutual, 406 N.J. Super. 406 N.J. Super. 524, 968 A.2d 724 (App. Div. 2009)).
In ordinary use and widely accepted definitions, physical damage to property means “a distinct, demonstrable, and physical alteration” of its structure. 10 Couch on Insurance § 148:46 (3d ed. 1998). Physical damage to a building as an entity by sources unnoticeable to the naked eye must meet a higher threshold. The Colorado Supreme Court in Western Fire Ins. Co. v. First Presbyterian Church, 165 Colo. 34, [968 A.2d 738] 437 P.2d 52 (1968), concluded that coverage was triggered when authorities ordered a building closed after gasoline fumes seeped into a building’s structure and made its use unsafe. Although neither the building nor its elements were demonstrably altered, its function was eliminated. [Wakefern Food v. Liberty Mut. Ins., 968 A.2d 724, 406 N.J. Super. 524 (N.J. Super., 2009)]
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Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and firstname.lastname@example.org
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