The Definition of Property Damage
Property Damage is Defined in Policy Definitions Section
Most small businesses purchase a commercial general liability (CGL) policy to protect themselves from property damage claims. Many also buy commercial auto insurance to safeguard their firm from property damage claims that result from the use of autos. In the context of insurance, property damage means damage to property that belongs to a third party, not property owned by the policyholder.
General Liability Policy
The ISO Commercial General Liability (CGL) Coverage Form contains the following definition of property damage:
(a) 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.
(b) 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.
Covers Damage to Tangible Property
Both parts of the definition limit coverage to tangible property. Section (a) covers physical injury to tangible property, including loss of use of that property. Section (b) covers the loss of use of tangible property that hasn't been injured.
When a claim involves loss of use, the loss of use is assumed to have occurred at the same time as the property damage or occurrence that caused it.
Tangible property is property that can be touched or felt like a building or a computer monitor. Examples of intangible property are trademarks and patents. Most property damage claims involve allegations that the insured has caused physical injury to tangible property owned by the claimant. For instance, a building owner sues a plumbing contractor for damage he caused to the building when he accidentally started a fire while welding a pipe.
Loss of Use of Injured Property
Part (a) of the definition of property damage includes the loss of use of tangible property that has been injured. Here's an example.
The Bountiful Bakery hires Able Appliance to repair a malfunctioning steam cooker. An Able employee is working on the cooker when he accidentally causes a steam explosion. The explosion doesn't affect the cooker but damages a doughnut maker situated nearby. The doughnut machine is unique and replacement parts are difficult to obtain. Repairs take six months.
The Bountiful Bakery sues Able Appliance for both the cost to repair the machine and loss of use. Bountiful has lost the revenue it would have earned in doughnut sales had the machine (which is tangible property) been available. The value of the lost revenue represents the loss of use.
Loss of Use of Uninjured Property
A loss of use claim can occur even if the claimant's property hasn't been physically injured. For example, Dave owns the Delish Diner, a popular restaurant. A contractor is using a crane to move a piece of equipment at a construction site across the street when the crane suddenly collapses. The Delish Diner is not damaged but local police close the street until the crane is removed. The area remains closed to the public for two weeks.
While the contractor has not caused any physical damage to Dave's property, its negligence has caused the diner to lose two weeks of sales. Dave sues the contractor for loss of use, demanding compensation for the lost sales.
The definition of property damage also addresses electronic data. It states:
For the purposes of this insurance, electronic data is not tangible property.
The definition includes a lengthy description of the meaning of electronic data. This term means information, facts or programs stored, created or used on, computer software and media, such as CD-ROMS and drives. The definition mirrors the one found in the electronic data exclusion. Here's an example of how this exclusion might apply to a property damage claim.
Larry's Landscaping has been hired by the Apex Apartments to plant a row of trees. A landscape worker is digging a hole for a tree when he accidentally cuts an electrical cable, causing a power outage. The outage damages electronic data stored on Apex's computer.
If Apex files a claim against Larry's Landscaping for damage to the data, Larry's liability policy won't provide coverage. Damage to electronic data doesn't qualify as property damage. Larry's policy should cover the cost of repairing the cable since damage to the cable itself constitutes property damage.
Commercial Auto Policy
The ISO Business Auto Policy contains the following definition of property damage:
"Property damage" means damage to or loss of use of tangible property.
This definition does not distinguish between injured and uninjured tangible property. Most auto liability claims involve tangible property that has been physically injured. The damaged property might be a vehicle, a building, or personal property owned by a third party.
It's important to distinguish property damage from physical damage. Property damage means damage to property belonging to a third party. Property damage is covered under commercial auto liability insurance. Physical damage means damage to the insured's covered auto. Physical damage insurance includes comprehensive and collision coverages.
North Star Mutual, "Commercial General Liability Coverage Form," page 15, accessed January 20, 2020.
Legal Information Institute, "Tangible Personal Property," accessed January 20, 2020.
American Association of University Professors, "Intangible Assets," accessed January 20, 2020.
IRMI, "Loss of Use As Property Damage," accessed January 21, 2020.
North Star Mutual, "Commercial General Liability Coverage Form," page 16, accessed January 20, 2020.
North Star Mutual, "Commercial General Liability Coverage Form," page 5, accessed January 20, 2020.
North Star Insurance Company, "Business Auto Coverage Form," page 12, accessed January 21, 2020.