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Home / Insurance / The property insurance industry is pushing to limit the concept of physical injury or physical damage | Property Insurance Protection Law Blog

The property insurance industry is pushing to limit the concept of physical injury or physical damage | Property Insurance Protection Law Blog



Yesterday’s post, Ohio Justices obviously do not have an electrical engineering degree when they rule that software cannot have a physical presence, resulted in a number of private emails to me. Some believe this case is a result of the fallout caused by Covid coverage cases where many cases found that Covid does not cause physical harm. As I see it, the trend for property insurers is to limit coverage by claiming that a loss or parts of a loss is not “physical” in nature and also spreading the myth that “loss of use” is not a physical loss but an “economic” one.

Reading the amicus brief filed by the insurance industry confirms this is their intent:

Cases related to physical damage claims for claims based on data and software

· Digital information is not tangible and therefore cannot bear physical loss or damage. Ward General Ins. Services, Inc. v. Employer Fire Ins. Co., 1

14 Cal.App4th 548, 7 Cal. Rptr 3D 844 (2003)

· “Computer data, software and systems are not ‘tangible’ property in the common sense of the word. . . . Computer data, software and systems are incapable of perception by any of the senses and are therefore intangible. . . software and systems are intangible objects stored on a material vessel – the computer or a disk.’ Damage to “computer data, software” is not covered under traditional property damage policies, but physical damage to tangible computer systems may be. America Online, Inc. v. St. Paul Mercury Ins. Co.207 F.Supp.2d 459, 468 (ED Va. 2002);

· In the absence of physical damage to any part of the host device or computer, there was no “physical damage” to the covered tangible property. Seagate Technology, Inc. v. St. Paul Fire and Marine Ins. Co.11 F.Supp.2d 1150, 1155 (ND Cal. 1998)

Cases related to claims for physical damages for claims based on contamination of intangible premises

· The plain meaning of “physical damage” requires “damage to the property that adversely affects the structural integrity of the property”. Mastellone v. Lightning Rod Mut. ins. Co., 175 Ohio App. 3d 23, 2008-Ohio-311, 884 NE2d 1130, ¶ 61 (8th Dist.) (presence of mold on exterior of structure does not constitute physical damage to structure)

· There is no “physical damage to property” where there is no “structural or other tangible damage”, only “intangible damage” such as strong odors and the presence of mold and/or bacteria in the air and ventilation system. Universal Image Prods. v. Chubb Corp., 703 F.Supp.2d 705, 710 (EDMich.2010)

· Asbestos contamination constituted an economic loss and not a physical loss, as the building remained physically unchanged Great Northern Ins. Co. v. Benjamin Franklin Federal Sav. & Loan Ass’n., no. 90-35654, 1992 US App. LEXIS 1593, 1992 WL 16749, *1 (9th Cir. Jan. 31, 1992) (unpublished)

Of course, the insurance industry also relied on a number of Covid-related cases to support its proposition:

• No covered “physical injury” occurred where pandemic shutdown orders “did not materially destroy [the property], either in whole or in part. . . and the property exists in the same condition as it did before the orders.’ Sanzo Ents. v. Erie Ins. Exchange, 5th dist. Delaware no. 21-CAE-06, 2021 Ohio App. LEXIS 4161, at *25 (Dec. 7, 2021)

· When the property is not “materially or appreciably destroyed, destroyed or damaged”. [and the owner] remain[s] in possession thereof, any alleged loss of use of the property falls outside the simple meaning of “direct physical loss of or damage to” the property. MIKMAR, Inc. v. Westfield Ins. Co., 520 F.Supp. 3d 933, 941 (N.D. Ohio 2021)

· Physical damage to tangible property is required to satisfy the “direct physical loss or damage” requirement, mere loss of use and purely economic use is not enough. System Optics, Inc. v. Twin City Fire Ins. Co.No. 5:20-cv-1072, 2021 WL 2075501 (ND Ohio, May 24, 2021)

· Coverage for “direct physical loss of property” applies only to physical property, not the temporary loss of use of the property for its original purpose. Henderson Road Restaurant Systems, Inc. v. Zurich American Ins. Co.ND Ohio no. 1:20-CV-1239, 2021 WL 5085283 (November 2, 2021)

· “The company’s inability to use the property in the same way as before [the even causing an interruption in typical use . . . does not satisfy the policy’s [direct physical loss] language.’ Bridal Expressions LLC v. Owners Ins. Co., 6th district no. 21-3381, 2021 US App. LEXIS 35676, at *4-5 (Nov. 30, 2021)

· ‘[A temporary] loss of use is simply not the same as one [direct] physical loss [of or direct physical damage to] property.’ Agilitas USA Inc. v. Hartford Fire Ins. Co., MDTenn. no. 3:21-cv-00094, 2021 US Dist. LEXIS 211531, at *16-17 (Nov. 2, 2021)

· A loss of use or function does not constitute “direct physical loss or damage”, as such an interpretation would allow coverage whenever property cannot be used for its intended purpose Oral Surgeons, PC v. Cincinnati Ins. Co., 2 F.4th 1141 (8th Cir. 2021)

· Potential presence of a virus on the property that renders the property temporarily unusable but does not require physical repair or prevent future use does not cause “physical damage or loss of the property.” Gilreath Family & Cosmetic Dentistry, Inc. v. Cincinnati Ins. Co., 11th district No. 21-11046, 2021 WL 3870697 (August 31, 2021)

Property insurance only covers financial losses. They do not cover sentimental losses. Loss of use leading to financial loss is covered even if there is no change in property. Theft of an item for sale is a classic example because the thief does not want to physically damage the item so that the resale value is maintained for the thief. The owner is deprived of ownership and loss of use, which property insurance policies cover the resulting financial loss.

Whether or not an exception applies to prevent coverage for ransomware losses is another matter. But to state that the data or the media have not, from a scientific point of view, undergone a physical change is beyond doubt. From a coverage standpoint, we can expect these arguments from some property insurance companies because some judges accept the “physical damage” and “lack of use” arguments.

Today’s thought

To steal is to steal. I don’t care if it’s on the Internet or if you break into a warehouse somewhere – that’s theft.

—Patrick Leahy


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