The Property Insurance Industry Is Pushing to Limit the Concept of Physical Damage or Physical Injury

Yesterday’s post, Ohio Justices Obviously Do Not Have an Electrical Engineering Degree When They Rule Software Cannot Have a Physical Presence, resulted in a number of private emails to me. Some believe that this case is a result of the fallout caused by Covid coverage cases where many cases found that Covid does not cause physical damage. As I see it, the trend for property insurers is to limit coverage by arguing that a loss or parts of a loss are not “physical” in nature and also spread 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 that this is their intent: 

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

· Digital information is not tangible and thus cannot sustain physical loss or damage. Ward General Ins. Services, Inc. v. Employer Fire Ins. Co., 114 Cal.App4th 548, 7 Cal. Rptr 3D 844 (2003)

· ‘Computer data, software and systems are not ‘tangible’ property in the common sense understanding 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 items stored on a tangible vessel – the computer or a disk.’ Harm to ‘computer data, software’ is not covered by traditional property damages policy, but physical damage to tangible computer systems can be. America Online, Inc. v. St. Paul Mercury Ins. Co., 207 F.Supp.2d 459, 468 (E.D. Va. 2002);

· In the absence of physical damage to any components of the host drive 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 (N.D. Cal. 1998)

Cases related to physical damage requirement for claims based on intangible premises contamination

· The plain meaning of ‘physical injury’ requires ‘harm 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 N.E.2d 1130, ¶ 61 (8th Dist.) (presence of mold on the outside of the structure does not amount to physical damage to the structure)

· There is no ‘physical injury to property’ where there is no ‘structural or any other tangible damage,’ only ‘intangible harms’ 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 (E.D.Mich.2010)

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 LEXIS 1593, 1992 WL 16749, *1 (9th Cir. Jan. 31, 1992) (unpublished)

Sure enough, the insurance industry also relied on a number of Covid related cases to support its proposition:

• No covered ‘physical damage’ occurred where the pandemic shut down orders did ‘not tangibly destroy [the property], whether in part or in full . . . and the property exists in the same state 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 perceptibly destroyed, ruined, or harmed [and the owner] remain[s] in possession of it,’ any alleged loss of use of the property falls outside the plain 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, the mere loss of use and purely economic use are not enough. System Optics, Inc. v. Twin City Fire Ins. Co., No. 5:20-cv-1072, 2021 WL 2075501 (N.D. Ohio, May 24, 2021)

· Coverage for ‘direct physical loss of property’ only applies to physical property, not the temporary loss of the use of the property for its original purpose. Henderson Road Restaurant Systems, Inc. v. Zurich American Ins. Co., N.D. Ohio No. 1:20-CV-1239, 2021 WL 5085283 (Nov. 2, 2021)

 · ‘The company’s inability to use the property in the same way as it did 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 Cir. No. 21-3381, 2021 U.S. App. LEXIS 35676, at *4-5 (Nov. 30, 2021)

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

· A loss of use or function does not constitute ‘direct physical loss or damage,’ because such an interpretation would allow coverage to be established whenever property cannot be used for its intended purpose Oral Surgeons, P.C. 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 precludes future use does not cause ‘physical damage or loss to the property.’ Gilreath Family & Cosmetic Dentistry, Inc. v. Cincinnati Ins. Co., 11th Cir. No. 21-11046, 2021 WL 3870697 (Aug. 31, 2021)

Property insurance policies only cover economic losses. They do not cover sentimental losses. Loss of use that results in economic loss has been covered even where there is no alteration of property. Theft of a good for sale is a classic example because the thief does not want to physically damage the good so that the resale value is maintained for the thief. The owner is deprived of the ownership and loss of use, which property policies cover the resultant economic loss.  

Whether or not an exclusion applies to prevent the coverage for ransomware losses is another issue. But to state that the data or the media have not, from a scientific standpoint, suffered a physical alteration is beyond doubt. From a coverage standpoint, we can expect these arguments from some property insurance carriers because some judges are accepting the “physical damage” and “lack of use” arguments. 

Thought For The Day 

Stealing is stealing. I don’t care if it’s on the Internet or you’re breaking into a warehouse somewhere – it’s theft.

—Patrick Leahy