The Definition of Property Damage
The term property damage has a specific meaning in general liability, commercial auto, and umbrella policies that is explained in the definitions section. These policies typically define property damage in the same manner as the standard ISO general liability policy.
Meaning of Property Damage
In the ISO liability policy the definition of property damage consists of two parts:
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.
What's Tangible Property?
The definition of property damage includes three types of losses: physical injury to tangible property, loss of use of injured tangible property, and loss of use of uninjured tangible property. Tangible property is property that can be touched or felt. Examples are an office building, a refrigerator, and a computer monitor. Property damage does not include damage to intangible property like trademarks and patents.
When people hear the words "property damage" they typically think of physical injury to tangible property. Most property damage claims involve this type of injury. Here are some examples:
- You are installing a new security system in a client's building when you accidentally break a window.
- You are spray-painting a steel building on a windy day. The wind blows paint into a nearby parking lot, damaging dozens of vehicles.
- A cigarette lighter your firm manufactured explodes inside a storage closet in a warehouse. The explosion and ensuing fire cause damage to the warehouse.
What's Loss of Use?
The definition of property damage covers the loss of use of tangible property, whether or not the property has been physically injured. Loss of use means the inability to use property.
Loss of Use of Physically Injured Property
Property damage includes the loss of use of property that has been physically injured. Here is an example.
Paul owns Premier Palette, a painting business. The firm has been hired by the Apex Apartments to paint a large suite that was recently vacated. The apartment manager has leased the apartment to a tenant who is scheduled to move in on June 1. A Premier employee is preparing the walls for painting when he accidentally starts a fire that severely damages the apartment. Repairs take four months and the tenant is unable to move in until October 1.
Apex Apartments sues Premier Palette for both the cost to repair the damage and loss of use. Apex has lost the rental income it would have earned from June through September had the fire not occurred. The value of the lost rental income represents the loss of use. In this case, the loss of use resulted from physical injury to tangible property.
Loss of Use of Uninjured Property
Property damage includes the loss of use of tangible property that has not been physically injured. For example, Dave owns the Delish Diner, a popular restaurant. Busy Builders, a construction contractor, is renovating a building next door to Dave's restaurant. One day, a wall Busy is working on collapses while a second wall begins to bulge. To protect the public, the local authorities cordon off the area, including the entrance to the Delish Diner. 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 Busy Builders for loss of use, demanding compensation for the lost sales.
Loss of use is assumed to have occurred at the same time as the property damage or occurrence that caused it. In the Premier Palette scenario, the loss of use would likely have taken place when the fire occurred. In the Delish Diner example, the loss of use probably occurred when the building wall collapsed.
The definition of property damage states that electronic data is not tangible property. It also explains what constitutes electronic data. Essentially, this term means information, facts or programs stored, created or used on, computer software and media, such as CD-ROMS and drives. This definition mirrors the one found in the electronic data exclusion. The following example demonstrates how this exclusion might apply to a property damage claim.
Premier Palette has been hired by the Apex Apartments to paint an office. A Premier employee is doing prep work when he accidentally cuts an electrical cable, causing a power outage. The power outage damages electronic data stored on Apex's computer. If Apex files a claim against Premier Palette for damage to the data, the claim will not be covered under Premier's liability policy. Electronic data is not tangible property. Premier's policy should pay the cost of repairing the cable since damage to the cable itself does qualify as property damage.
Commercial Auto Policy
In the ISO Business Auto Policy, 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.
A commercial auto policy covers both property damage and physical damage. Property damage means damage to property belonging to a third party (someone other than an insured). It is covered under commercial auto liability insurance. Physical damage generally means damage to an auto owned by the policyholder. Physical damage is insured under comprehensive and collision coverages.