The Definition of Property Damage

Tornado Victim Looking at Rubble
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The word property damage is widely used in commercial liability insurance. It is a defined term in general liability, commercial auto and umbrella policies. This article will explain what it means.

Meaning of Property Damage

Most liability and umbrella policies contain the same definition of property damage found in the standard ISO liability policy. The latter defines property damage as:

  1. Physical injury to tangible property, including all resulting loss of use of that property;
  1. Loss of use of tangible property that is not physically injured

The definition states that electronic data is not tangible property. Electronic data is also a defined term. Its meaning is explained in a separate, lengthy definition. Essentially, electronic data means information, facts or programs stored, created or used on, computer software and media, such as CD-ROMS and drives.

Tangible Property

The definition of property damage includes two types of losses. First, it includes physical damage to tangible property. Tangible property is property that can be touched or felt. Property damage does not include damage to intangible property like trademarks and patents.

Secondly, property damage includes the loss of use of tangible property. Loss of use is covered whether or not the tangible property has been physically injured.

What is Loss of Use?

Loss of use means the inability to use property, either because the property has been damaged or because of some other accidental event.

Here are two examples of loss of use that would likely be covered by a general liability policy.

Loss of Use of Damaged Property

Suppose that you operate a painting business. You have been hired by a building owner to paint a small office. The owner has leased the office to a tenant who is scheduled to move in on June 1.

You are preparing the walls for painting when you accidentally start a fire that severely damages the office. Repairs take three months and the tenant is unable to move in until September 1.

The building owner sues you for both the cost to repair the damage and loss of use. Because the office space is unusable until the repairs are completed, the owner will lose the rental income it would have earned 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 Undamaged Property

Now suppose that your painting company has been hired to paint an office in a small apartment building. The work takes three days. When you leave at the end of the last day, you neglect to close the office door. Two skunks enter the office and have a fight. They spray the interior of the office. The building owner sues you for the cost of cleaning the office and replacing some damaged furnishings. He also sues you for loss of use.

While the skunks didn't damage any of the apartments, their odor made the units unlivable. The tenants were forced to relocate to a nearby motel for thirty days.

Because of your negligence, the building owner forfeited one month's rent for each apartment. He demands compensation for loss of use. The property damage to the apartment units involved loss of use of tangible property that wasn't physically injured.

Loss of use is assumed to have occurred at the same time as the property damage or occurrence that caused it. In the first scenario, the loss of use would likely have taken place when the fire occurred. In the second scenario, the loss of use may have occurred when you failed to close the door or when the skunks fouled the office.

Electronic Data

As noted above, electronic data is not tangible property. Moreover, the ISO general liability policy contains an exclusion that precludes damage to electronic data. The following example demonstrates how this exclusion might apply.

Your painting company has been hired by a building owner to paint an office. While preparing the building for painting, you accidentally cut an electrical cable. The power outage damages electronic data stored on the customer's computer. If the customer files a claim for damage to the data, the claim will not be covered. Electronic data is not tangible property. The damage to the cable itself should 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, and it is important to understand the difference. Property damage means damage to property belonging to a third party (someone other than an insured). It is covered under commercial auto liability coverage. Physical damage means damage to an auto covered by the policy. Physical damage is covered under Comprehensive and Collision coverages.