Recently I was contacted by a very astute insurance educator about the “physical damage” aspect of COVID-19 property insurance claims. He had read my article that takes the position that a viral contamination likely does not constitute “direct physical loss” so as to trigger coverage under the ISO CP 00 30 business income coverage form.

He pointed out that insurers routinely cover claims like furnace puffbacks that leave an oily soot deposit on property that may cost tens of thousands of dollars to remediate or repair. Similarly, bacteria contamination of food products like E. coli are often covered by property policies that are triggered by physical damage. So, the question is, why wouldn’t a viral contamination also be considered physical damage?

This article is an attempt to answer that question. It is not a legal tome citing dozens of court cases. The courts can’t agree on what constitutes physical damage, though I believe the consensus and the better decisions are evidenced in this excellent article by attorney Scott G. Johnson, a partner with Robins Kaplan LLP, from the Winter 2019 edition of the Tort Trial & Insurance Practice Law Journal:

What Constitutes Physical Loss or Damage in a Property Insurance Policy?

This is the most recent and comprehensive examination I’ve seen of this issue. The 30-page article concludes with:

Physical loss or damage remains a necessary predicate to property insurance coverage. Using the dictionary definition of “physical” as a guide, many courts require that an insured demonstrate that the insured property suffered a distinct, demonstrable, and physical change or alteration to satisfy the threshold requirement for coverage. Some courts have even found that the insured has this burden even where the claimed physical damage occurs at the molecular or microscopic level.

But other courts have adopted a much broader interpretation of the “physical loss or damage” requirement. These courts have found coverage in the absence of a distinct, demonstrable physical alteration of the property where the insured property has become uninhabitable or where a property’s function or reliability has been impaired. Thus, in some courts’ view, loss of property’s use, functionality, or reliability can constitute physical loss or damage. But in doing so, these courts have largely rendered the word “physical” meaningless and have failed to account for the historical origins of the “physical loss or damage” requirement.

Again, I believe that the judicial opinions finding that physical damage requires some physical change or alteration of property to trigger coverage, something more than a temporary impairment or loss of function or habitation, to be the better reasoned opinions. As the author concludes, opposing decisions reflect a lack of perspective of the historical origins and evolution of physical loss requirements.

Most property policies today require DIRECT physical loss or damage, as distinguished from INDIRECT loss or damage. Historically, in the insurance industry, “direct” damage is distinguished from “indirect” loss of use claims which is what the latter decisions mentioned above, in my opinion, erroneously consider to be direct physical loss.

The courts don’t always get it right. A good example is the disparity in judicial decisions about whether faulty workmanship or defective construction constitute an “occurrence” under the ISO CGL policy. A majority of courts find that truly accidental faulty workmanship IS an “occurrence.” That doesn’t mean such claims are covered…it just means the insuring agreement is triggered and other exclusions and limitations in the policy will govern coverage. Judicial conclusions to the contrary, given identical facts and circumstances, I believe represent a fundamental lack of historical perspective and understanding of how this policy works. That may well be the case with property insurance decisions that find temporal surface impairments of property to be “direct physical damage.”

So, what should constitute physical damage?

I believe that physical damage is a function of “physicality” and “permanence,” rather than temporary impairment. Direct physical damage must be distinguished from indirect damage that results in a loss or modification of use without any real and permanent alteration of property.

In the case of furnace puffbacks, if you do nothing, in weeks, months or years, you will find the oily soot still there and that property damage has probably continued to degrade as a result. In the case of a COVID-19 viral infection, if you do nothing, in a matter of days, the “damage” is gone.

In another article I wrote entitled Business Income Insurance…Does It Cover Coronavirus Shutdowns? I illustrated this point by noting that a dented fender is considered physical damage under an auto policy and charred wood is considered physical damage by a property policy. Dented fenders and charred wood do not become undented and uncharred of their own accord. Viral infections apparently do. According to the experts, they are not permanent. They do not alter the property in any material way. They simply reside on the surface until they die or are removed by cleaning.

I haven’t driven my car in over a week and it’s covered in pollen. According to some judicial decisions about what constitutes physical damage, I should be able to file an auto comprehensive claim, especially if I’m asthmatic or have severe allergies. Or I could wait until a few hours from now when it’s supposed to rain. Or I could apply water from a garden hose to remove the “contamination” from the vehicle.

At that point, I have no damage and certainly no direct damage. At worst, I have an indirect loss of use that existed until I cleaned my auto. In the case of business income coverage, most policies have a 72-hour waiting period that is likely sufficient to remediate the contamination before coverage is actually triggered.

In the case of an E. coli food contamination in a restaurant or grocery, there is no direct physical damage to most containment and processing surfaces, but there is certainly direct damage to the food product which is permanent and sometimes covered by property policies without a virus or bacteria exclusion. The cleaning of the surfaces might also be covered since most direct property coverage policies do not have the waiting period found in most business income policies.

The remediation of a virus and a furnace puffback are two very different things. The soot adheres to the property and is difficult to remove, requiring extensive cleaning, repairing, painting, etc. A virus may be removed from a table top or doorknob with a Clorox wipe. Or, again, just wait a few days and the contamination is gone. In the case of an E. coli contamination, some property damage is permanent, some is not.

While these losses are similar, I believe the physicality and permanence differences make some losses covered but others that constitute only a temporary surface impairment not covered.

And, once again, we need to examine insurance contracts in the proper historical perspective, something too many people in legal and insurance professions lack. Property insurance policies are not intended to cover catastrophic, widespread types of losses like viral pandemics. They never have been. A furnace puffback affects a single home. An E. coli contamination will usually impact a relatively small number of businesses, not hundreds of thousands or even millions.

In ISO’s CGL policy, there is coverage for both direct and certain indirect types of property damage, but there is a specific exclusion for “impaired property” as defined in that policy form. In the future, perhaps we’ll see property forms distinguish between these types of property damage on a similar contractual language basis, covering claims where damage is permanent and involves alteration of the property but not covering claims that can be remediated quickly and easily.

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Bill Wilson

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One of the premier insurance educators in America on form, coverage, and technical issues; Founder and director of the Big “I” Virtual University; Retired Assoc. VP of Education and Research from Independent Insurance Agents & Brokers of America. Reprint Request Information