InsurOp-Ed: What Does “Direct Physical Loss Of Or Damage To Property” Mean?

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Recently, I’ve read a bunch of articles touting a North Carolina pro-policyholder COVID-19 decision that, among other similar erroneous conclusions, opined that “loss of” can also mean “loss of use of.” The premise is that, under the insurer’s business income form language, “loss of” property can also mean the inability to use the property even if it is not physically or permanently altered in some way. In other words, the inability to access the property in a customary way triggers coverage under the form.

I addressed this issue in my “Why Insurance Doesn’t Cover the COVID-19 Pandemic” book published in December 2020. The following is an excerpt from that book explaining why “loss of” and “loss of use of” are not equivalent. The book goes on to also cite case law that has reached the same conclusion.

Most property policies today require DIRECT physical loss or damage, as distinguished from INDIRECT, or consequential, loss or damage. Historically, in the insurance industry, “direct” loss is distinguished from “indirect” loss of use. Many of the articles written about COVID-19 by policyholder attorneys, as well as the lawsuits they file, claim that “direct” loss includes “loss of use.” That’s simply not the case and never has been.

That view, if more than simply wishful thinking or an effort to torture words until they confess to something they didn’t do, does not reflect an understanding of the intent of the insurance contract. The importance and value of an historical perspective of insurance contract language is discussed below in determining what is meant by “physical” loss.

Distinguishing between direct loss v. direct loss of use of property

The key distinction here is that the policy language explicitly refers to “direct loss of property,” not “direct loss of use of property.” If loss of use was intended, the language likely would be worded that way. For example, consider this excerpt from the definition of “property damage” in ISO’s Commercial General Liability (CGL) policy [emphasis added]:

“Property damage” means:

1. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
2. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it….

An illustration

Note that the CGL policy covers three categories of “property damage”: (1) physical injury to tangible property, (2) loss of use of that physically injured tangible property, and (3) loss of use of tangible property that is not physically injured.

To illustrate, a bucket truck operator repairing electrical lines on a business premises loses control of the bucket, crashing it into a restaurant building and tearing down several electrical lines. The restaurant is shut down for several weeks for repairs and several other businesses lose power and shut down for a day or two.

If the crew’s CGL policy responds to the claims, coverage corresponding to the three categories of “property damage” above would (1) pay for the repair of the restaurant building and contents, (2) indemnify the restaurant for its loss of business income, and (3) compensate the other business for their business income losses even though they had no physical injury to their property. So, the CGL policy responds to both direct losses as in (1) above and to indirect losses as in (2) and (3) above.

First-party property forms aren’t that comprehensive because they cover limited contractually agreed-upon types of loss or damage, whereas CGL policies cover very broad legal liabilities imposed mainly in tort. Physical injury to tangible property is covered by direct loss property forms such ISO’s CP 00 10 – Building and Personal Property Coverage Form, whereas loss of use of property is covered by indirect loss property forms such as ISO’s CP 00 30 – Business Income (And Extra Expense) Coverage Form, but the latter only of there is first direct damage to property.

In other words, compared to ISO’s CGL policy, their property forms cover only categories (1) and (2) property damage. The CP 00 10 covers category (1) direct damage, while the CP 00 30 covers category (2) which is contingent on there being direct physical loss or damage to tangible property. The CP 00 30 is not triggered by the indirect loss of use of physical property…it’s triggered by the direct loss of or damage to physical property. The business income loss itself IS the loss of use.

To further illustrate direct vs. indirect/consequential loss, property forms may include, by endorsement or on a sublimited basis, coverage for “Ordinance or Law” claims. For example, a $2M building is 50% damaged by a covered cause of loss, so the local building code requires the demolition of the undamaged portion of the building. That $1M cost is a consequential loss and not damage (“loss” vs. “damage” is discussed below). And it’s not a direct loss, but rather an indirect loss that resulted from a direct loss to tangible property.

As another example, most property policies exclude damage resulting from power failure, but some damages can be covered by endorsement. These options may cover food spoilage, property damage due to temperature changes, etc. However, if the business simply cannot operate without power, the business income loss is purely economic…there has been no direct physical damage.

As a side note, it’s interesting that, to my knowledge, few, if any, lawsuits have been filed alleging direct damage under a form such as ISO’s CP 00 10 or a BOP policy. One would think that, if the plaintiff’s attorney truly believed that the alleged presence of SARS-CoV-2 constituted “direct physical” loss of or damage to property, a claim under that or another direct damage property form would have been filed.

For those looking to dig deeper

A deeper dive into all of the insurance issues of the COVID-19 pandemic can be found in my book “Why Insurance Doesn’t Cover the COVID-19 Pandemic” which is available for download on Amazon for only $6.99. In the North Carolina case referred to above, a different decision might have been reached had all parties read this book.

For those interested in viewing all of Mr. Wilson’s books, they can be viewed on his Amazon author page here.

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