Expert Commentary

Loss of Use as Property Damage

The John Hancock Tower, located in the Back Bay area of Boston, is the tallest building in New England. While under construction in the early 1970s, there were a few problems. The windows, each weighing 500 pounds, began falling out of the 790-foot structure.


Liability Insurance
June 2021

Considering there were over 10,000 windows,1 this misadventure gave new life to the view that the sky is falling. The result was that areas adjacent to the structure were cordoned off, prohibiting access by pedestrians.

A restaurant located in an adjacent building (but not located in the tower) sued the contractor and curtain wall subcontractor, alleging property damage in its complaint—the falling glass prevented the public from accessing the restaurant. Even though the restaurant suffered no physical injury to its property, the restaurant alleged that its property was rendered useless and, thus, suffered loss of use of tangible property.

The court observed that if a large piece of contractor's equipment broke down in a public street, resulting in the closing of that street, loss of use of the stores suffered by store operators on that street would be covered as property damage. Although the Hancock Tower case involving the restaurant was a determination of the duty to defend, the court found coverage for the restaurant's claim under loss of use of property that was not physically injured in Continental Cas. Co v. Gilbane Bldg. Co., 391 Mass. 143 (1984).

The Evolution of Property Damage

The definition of "property damage" has evolved over the last several decades. For example, whether diminished value constitutes physical injury and, thus, property damage is still being debated. Does merely installing a defective product onto nondefective property result in physical injury to the nondefective property to which the defective product is attached? The answer, in part, hinges on what, exactly, constitutes "physical injury to tangible property."

One example is the case of Eljer Manufacturing. The plumbing systems made by Eljer and installed in numerous homes had shown signs of defects, with some of the systems leaking and causing water damage. The question was whether the homes with Eljer systems that had not leaked suffered property damage. The Seventh Circuit Court of Appeals, applying Illinois law, focused on the drafting history and the purpose of insurance. It found that property damage had occurred upon installation, in part because the homes with the defective plumbing systems had suffered diminished value. In other words, the court found that the diminished value of the houses with the defective plumbing systems had been physically injured. See Eljer Mfg., Inc. v. Liberty Mut. Ins. Co., 972 F.2d 805 (7th Cir. Ill. 1992).

Several years later, the Seventh Circuit Court's decision was reversed. The Illinois Supreme Court found that the incorporation of a defective component into the homes was not physical injury and, thus, not property damage; tangible property does not experience physical injury if that property suffers intangible damage, such as diminution in value. See Traveler's Ins. Co. v. Eljer Mfg., Inc., 757 N.E.2d 481 (Ill. 2001).

In U.S. Metals, Inc. v. Liberty Mut. Group, Inc., 59 Tex. Sup. J. 144, 2015 Tex. LEXIS 1081 (2015), the Texas Supreme Court found that incorporation of a defective product was not physical injury to tangible property and, thus, was not property damage, even if the property suffered diminished value, citing (in part) the Illinois Supreme Court case of Traveler's v. Eljer as a basis for its decision.

Loss of Use as Property Damage—A Simple Proposal

Loss of use means precisely what the words state—no more and no less. Damages payable by a commercial general liability (CGL) policy because of loss of use are a type of damages that are the consequence of not being able to use property. Within the CGL policy and subject to all exclusions and limitations, covered loss of use results from being deprived of the use of tangible property, and the coverage applies to pay such damages whether or not the tangible property has been physically injured.

Loss of use damages are often appropriately couched in terms of consequential damages. By design, loss of use damages compensate a property owner for damages that result from "a reasonable period of lost use" of the personal property. The amount of damages may thus be measured according to the particular loss experienced, such as the amount of lost profits, the cost of renting a substitute chattel, or the rental value of the owner's own chattel.

J&D Towing, LLC v. American Alternative Ins. Corp., 478 S.W.3d 649 (Tex. 2016).


Loss of use occurs whenever there is an interruption of normal use of property. This interruption may be caused by a tangible, physical blockage of access to property. The unifying factor … is that the property in question … cannot be used.

Rhonda D. Orin, "The Meaning of Loss of Use in the Definition of Property Damage," Insurance Litigation Reporter, October 1, 1990.

In other words, the meaning of loss of use within the CGL policy's definition of property damage are damages that are similar in nature to time element damages suffered by a business during a period of interruption. This notion is reinforced by the timing of when loss of use damages are payable as property damage. "All such loss of use shall be deemed to occur at the time of the 'occurrence' that caused it." Commercial General Liability Policy Coverage Form CG 00 01 04 13 © ISO Properties, Inc., 2012.

In Continental v. Gilbane, the CGL policy in effect at the time of the occurrence causing those damages—the falling windows—will pay for all loss of use damages even if the loss of use damages continued for months after the policy expiration.

If a building is physically injured in Policy A and has resultant loss of use extending over Policy A and later Policy B, all of the damages would be covered by Policy A.

Joint Forms Committee, Minutes (August 4 & 5, 1970), quoted in Rhonda D. Orin, "The Meaning of Loss of Use in the Definition of Property Damage," Insurance Litigation Reporter, October 1, 1990.

Additional Examples of Loss of Use

A contractor performing road repairs ruptures the public water main, resulting in the closing of at least one business that requires the water as part of their processing operations. Due to lack of reasonable maintenance, a billboard collapses, blocking the entrance to a gasoline station and preventing customers from accessing the station until the billboard and its debris can be moved by the billboard's owner.

What Are Not Loss of Use Damages?

Other types of losses involving property may not be loss of use damages. More specifically, diminished value or the cost of repair are not usually considered loss of use damages.

However, we previously have stated that "[d]iminution in value—even to the point of worthlessness—is not the same as 'loss of use' under the insurance policy, which by its plain language contemplates some sort of loss of use in fact, not a reduction in value."

Wisconsin Pharmacal Co., LLC v. Nebraska Cultures of Calif., Inc., 876 N.W.2d 72 (Wis. 2016).

In any event, as we have noted above, the diminution in value award in this case was simply an alternate of the cost of repair damages, and did not fundamentally recharacterize the nature of the harm in such a way to trigger coverage under West Bend's CGL policy.

Vogel v. Russo, 236 Wis. 2d. 504, 518 (2000).

Diminution in value and cost of repair are not two separate harms—they are two different ways of measuring the same harm.

New Hampshire Ins. Co. v. Vieira, 930 F.2d 696 (9th Cir. Cal. 1991).

However, even though diminished value is not generally enough to establish physical injury to tangible property, some courts have used diminished value as a measure of damages resulting from a loss of use claim.

Sombrero did suffer a loss of use of tangible property. Moreover, the diminution in value of the property was a proper measure of the damages for loss of use. Thus, the mere fact that Sombrero was seeking to recover damages calculated on the basis of diminution in value falls short of showing that it was not seeking to hold CES liable for a loss of use of tangible property.

Thee Sombrero, Inc. v. Scottsdale Ins. Co., 28 Cal. App. 5th 729 (2018) at 740.

Also, preventative costs, particularly when there is no physical injury to tangible property, are not usually considered damages because of property damage and, thus, not usually covered by the CGL policy.

Our determination does not strip the word "damages" of all meaning; to the contrary, it refines the definition to include only those costs which are remedial, not preventive. [Emphasis added.]

Coakley v. Maine Bonding & Cas. Co., 136 N.H. 402 (1992).

Loss of Use Damages as Property Damage—A Critical View

The following illustrations are intended to look more closely at property damage and loss of use claims involving a situation of a lost master key as well as the measure of damages when held liable for the theft of tangible property.

The Lost Master Key—The Claim

A contractor was hired to perform work at an apartment complex and was provided a master key. Inexplicably, an employee of the contractor somehow misplaced the master key. Upon learning that the contractor could not account for the whereabouts of the master key, the apartment complex determined that it was necessary to change all of the locks on each apartment door. This decision resulted in the apartment complex making a claim against the contractor, alleging the contractor was liable for the cost of replacing all of the locks. Is the cost of replacing the locks considered property damage within the contractor's CGL policy?

As the locks did not suffer physical injury, this claim does not fit within the first prong of the definition of property damage—physical injury to tangible property. But as the locks are tangible property, does the cost of replacing all of the locks fall within the second prong of property damage definition—loss of use of tangible property that has not been physically injured? The short answer is no, as this claim does not allege that the apartment complex cannot use the existing locks.

The Lost Master Key—Preventative Costs

Loss of the master key does not keep the locks from functioning—the locks still secure the doors. The real issue is one of security. The apartment does not know who has the lost master key, and thus, security may be compromised. The cost of replacing the apartment door locks is a preventative cost, not a claim for loss of use damages. Preventative costs, particularly without actual physical injury to tangible property, usually do not constitute damages because of property damage.

The Lost Master Key—Repair Costs

As noted above, the repair cost of the locks does not constitute loss of use damages—and therefore, not property damage. The resulting consequential damages for loss of use may be the loss of renters because of the compromised security—a potential renter was ready to enter a lease but backed out when the issue of the master key was disclosed. In other words, if the apartment complex made a claim for not solely the cost of replacing the locks but rather damages for the loss of use of the apartments because of security issues, it is possible that such a claim would represent a loss of use claim. One court observed the following.

… insecurity and unsafety in the use of property raises the specter of loss of use.

Mid-Continent Cas. Co. v. Adams Homes of Nw. Fla., No. 17-12660 (11th Cir. 2018).

But, in the above example, the only claim is for the cost to replace the fully functional locks. Such costs are preventative and not damages covered under a CGL policy. Payments to replace the locks are not damages because of loss of use of tangible property.

The Lost Master Key—Preventative or Repair Cost May Be Less Expensive

While the cost of paying for the replacement of the locks may be less expensive than paying for any actual loss of use claims, that does not transform such payments into damages because of property damage. Consider the Hancock Tower claim by the restaurant. The restaurant was not alleging the insurer should pay to fix 10,000 windows, even though that would have resulted in an end to its loss of use claim, but was claiming loss of use of its restaurant.

Similarly, in the example of the large piece of contractor's equipment that breaks down and blocks the street, the store owners are not demanding the cost of the removal of the piece of equipment as their damages. And the gasoline station is not demanding the cost of the removal of the collapsed billboard. The claim is for the loss of use of their own property.

In sum, costs to replace the locks are preventative cost and not damages for loss of use as covered under a CGL policy.

Theft of Tangible Property as Property Damage—The Claim

In a hotel's parking garage, a customer's car is broken into, and items are stolen. The hotel customer makes a claim against the hotel, as he finds out from the local police that the hotel knew of frequent thefts from cars parked in the hotel's garage but took no precautions. Presuming the car or its stolen contents was not in the care, custody, or control of the hotel, does this claim constitute property damage?

The contents stolen from the auto are tangible property, but have those items been physically injured, and thus, do they meet the first prong of the definition of property damage—physical injury to tangible property? And what of the loss of use of the tangible property stolen (golf clubs)—would the theft constitute loss of use of tangible property?

Theft of Tangible Property as Property Damage—A Contrary View

The traditional view is that theft of tangible property for which an insured is liable is not considered physical injury to tangible property but, rather, solely loss of use of tangible property that has not been physically injured.

Appellant [Travelers] subsequently filed a declaratory judgment seeking to determine if theft was covered by the policy under its definition of property damage. The trial court found the theft was covered by the policy. At oral arguments both parties agreed that the coverage for the theft arises out of only the second definition of property damage, to-wit: (2) loss of use of tangible property which has not been physically injured or destroyed.…

Travelers Ins. Co. v. De Bothuri, 465 So.2d 662 (Fla. Dist. Ct. App. 1985).

But the customer in this example is claiming the value of his golf clubs, not damages arising from renting golf clubs until his stolen clubs can be replaced.

"Loss of use" of property is different from "loss" of property. To take a simple example, assume that an automobile is stolen from its owner. The value of the "loss of use" is the rental value of substitute vehicle; the value of the "loss" of the car is its replacement cost.

Collin v. American Empire Ins. Co., 21 Cal. App. 4th 787 (1994) at 818.

And as noted above, a claim for the value of the item is not the same as the damages resulting from the loss of use of that item.

Whether the golf clubs are actually damaged or destroyed is unknown. Nonetheless, whether the stolen clubs are known to be physically damaged is not the measure of physical injury to tangible property.

Theft of Tangible Property Is Physical Injury to Tangible Property

Instead, the measure should be whether the property is "altered in appearance, shape, color or other material dimension" [emphasis added], as stated in Traveler's v. Eljer. Because the golf clubs are no longer in the possession of the owner, certainly from the owner's perspective, the golf clubs are altered in an "other material dimension"—the clubs are gone. Here is what another court observed regarding the consequence of stolen property.

… when property is stolen, its market value to the one who lawfully possessed it is totally diminished. Because the theft of property [totally] diminishes its market value to the person who lawfully possessed it, that theft must be considered property damage….

Westfield Ins. Co. v. Eagle Electric, Inc., No. 16-1639 (M.D. Fla. 2017).

The damages are because of physical injury to tangible property—measured by the value of the clubs—and not damages because of loss of use of tangible property that is not physically injured.

As further support for theft as physical injury to tangible property, consider the following. Two months after reporting the theft, the police find the golf clubs completely destroyed, as they were apparently burned by the thief. Now there is no longer a question as to whether the tangible property is physically injured. Does the hotel's CGL insurer now owe additional damages (damages in addition to the loss of use damage) because of physical injury to tangible property?

In other words, are damages because of property damage determined at some future date—a date that may never arrive as the final destination of the clubs may never be known? It would be quite impractical to determine whether there is physical injury to tangible property based solely on whether the stolen items are found, if they are ever found, or to require the insurer to pay for the value of the clubs only if recovered.

For example, where a workman's tools are converted, he may recover not only the value of his tools at the time of conversion and pre-judgment interest on that value, but also "such amount as the jury might believe from the evidence would be more adequate to the loss he sustained in being deprived of their use in the exercise of his trade." [Emphasis added.]

J&D Towing, LLC v. American Alternative Ins. Corp., 478 S.W.3d 649 (Tex. 2016).

Loss of Use of Tangible Property That Is Physically Injured

There may not be a sustainable loss of use claim at all by the owner. If the clubs were not likely to be used again for months because of the seasonal nature of golf, the owner of the clubs would not be able to show any loss of use damages at the time of theft.

On the other hand, if the clubs were stolen on the way to a golf vacation and the owner has to rent clubs, the cost of the rental would be loss of use damages and would be in addition to the damages for the value of the clubs.

Conclusion

Not all losses to or impairment of property is considered property damage. While older case law may have held that diminished value of property was property damage (i.e., physical injury to tangible property), that view does not have a basis in today's CGL policy definition of property damage.

The following view was expressed by the Illinois Supreme Court in its reversal of the Seventh Circuit Court of Appeals decision in Traveler's v. Eljer.

Had the Eljer court applied its own ordinary meaning interpretation of the phrase "physical injury" to the claims presented, the result would have been the same as our result today: without a "harmful change in appearance, shape, composition, or some other physical dimension" (Eljer, 972 F.2d at 809) to the claimants' property, the insurance coverage is not triggered. We believe that the Eljer majority erred when it set aside the "central," plain, and ordinary meaning of the term "physical injury," and instead employed an admittedly "conjectured" analysis with respect to the function that the phrase was intended to perform in a CGL policy.

While there is plenty of room for debate on the when and how damages because of property damage apply, urging overly broad damages attributed to loss of use is not generally supported by the CGL policy's definition of property damage. In fact, the CGL policy does not define "loss of use," and thus, that phrase should be given its plain and ordinary meaning, as noted in Traveler's v. Eljer above. With this in mind, it appears evident that loss of use damages are distinctly different from damages that result from physical injury to tangible property. The former measures consequential loss because of deprivation of the use of the property; the latter measures the value of the property that has been physically injured.

The distinction between repair costs (or diminished value if not repaired) and loss of use damages is reflected in the American Law Institute's Restatement. J&D Towing, LLC v. American Alternative Ins. Corp., 478 S.W.3d 649 (Tex. 2016).

The Restatement (Second) of Torts fundamentally changed that recovery scheme. Section 927 now provides, in relevant part: the following.

  1. When one is entitled to a judgment for the conversion of a chattel or the destruction or impairment of any legally protected interest in land or other thing, he may recover …
    1. the value of the subject matter or of his interest in it at the time and place of the conversion, destruction or impairment; …
  2. His damages also include:
    1. the additional value of a chattel due to additions or improvements made by a converter not in good faith;
    2. the amount of any further pecuniary loss of which the deprivation has been a legal cause;
    3. interest from the time at which the value is fixed; and
    4. compensation for the loss of use not otherwise compensated.

Tort damages include both the value of the subject matter and compensation for loss of use—loss of use is clearly not the equivalent of the value of the property.


1 Dialynn Dwyer, "WhenThey Built the Hancock Tower—and It Started FallingApart," Boston.com, July 15, 2015.


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