The coverage grant in most property insurance policies provides that the policy covers “direct physical loss or damage” to covered property caused by a covered cause of loss during the policy period. Direct physical loss is therefore an important threshold requirement for coverage under most property insurance policies. The “‘requirement that the loss be ‘physical,’ given the ordinary definition of that term is widely held to exclude alleged losses that are intangible or incorporeal, and, thereby, to preclude any claim against the property insurer when the insured merely suffers a detrimental impact unaccompanied by a distinct, demonstrable, physical alteration of the property.’” Meridian Textiles, Inc. v. Indemnity Insurance Co. of North America, No. 06-4766, 2008 U.S. Dist. LEXIS 91371 (C.D. Cal. 2008), quoting 10A Couch on Ins. § 148.46 (3d ed. 2005).
Courts have generally held that where there is no tangible loss, the direct physical loss requirement is not satisfied. See, e.g., Tocci Building Corp. v. Zurich American Insurance Company, 659 F. Supp. 2d 251 (D. Mass. 2009) (no coverage for grouting costs where wall did not sustain direct physical loss); (Port Auth. of New York and New Jersey v. Affiliated FM Ins. Co., 311 F.3d 226, 236 (3d Cir. 2002) (denying coverage for mere presence of asbestos in building’s components, as opposed to the actual release of asbestos into air, based on direct physical loss requirement); Fujii v. State Farm Fire & Casualty Co., 857 P.2d 1051, 1053 (Wash Ct. App. 1993) (denying coverage where a landslide upslope from insured home undermined the lateral support for the home, but did not cause any “discernible physical damage to the dwelling”); Glen Falls Ins. Co. v. Covert, 526 S.W.2d 222, 223 (Tex. Civ. App. Beaumont 1975) (holding that plaintiff’s failure to demonstrate actual physical damage to insured property precluded coverage).
In addition, courts have held that the insured must demonstrate that the property’s initial state was satisfactory and the event under which coverage is sought made it unsatisfactory. In Trinity Industries Inc. v. Insurance Co. of North America, 916 F.2d 267, 270-71 (5th Cir. 1990), the court stated that “[t]he language ‘physical loss or damage’ strongly implies that there was an initial satisfactory state that was changed by some external event into an unsatisfactory state – for example, the car was undamaged before the collision dented the bumper. It would not ordinarily be thought to encompass faulty initial construction.” Courts therefore generally analyze whether there has been physical damage or alteration to covered property. The court in Columbiaknit, Inc. v. Affiliated FM Ins. Co., No. 98-434-HU, 1999 U.S. Dist. LEXIS 11873, *18 (D. Or. Aug. 4, 1999) stated, for example, that “[t]he recognition that physical damage or alteration of property may occur at the microscopic level does not obviate the requirement that physical damage need be distinct and demonstrable.”
It is important to note that some courts have, under some circumstances, ignored the requirement that there be a direct physical loss. For instance, some courts have found coverage in the absence of physical alteration of the property where the insured structure has become uninhabitable, or where a product’s function and value has been impaired due to a government regulation. See, e.g., Western Fire. Ins. Co. v. First Presbyterian Church, 437 P.2d 52, 56 (Colo. 1968) (finding direct physical loss where gasoline vapors had infiltrated insured building rendering it uninhabitable); Gen. Mills, Inc. v. Gold Medal Ins. Co., 622 N.W.2d 147, 152 (Minn. Ct. App. 2001) (finding direct physical loss despite absence of tangible injury where government regulations rendered food product unfit for sale and thereby caused “impairment of function and value” to this property). Depending on the specific language in the policy, “loss of use” can be considered direct physical loss even where there is no physical impairment of the property. See, e.g., In re Chinese Manufactured Drywall Prods. Liab. Litig., 759 F. Supp. 2d 822, 833 (E.D. La. 2010) (finding the presence of corrosive drywall is a direct physical loss).
Finally, another litigated topic with respect to direct physical loss is whether coverage is triggered by a “loss” where there is no “damage” to insured property. This frequently occurs in business interruption and civil authority claims. Insureds have argued that the term “direct physical loss or damage” is ambiguous in that “direct physical” only modifies “loss,” not “damage” where uninsured property is damaged and causes the insured to incur a loss. The Southern District of New York discusses this issue in The Philadelphia Parking Authority v. Federal Ins. Co., 385 F. Supp. 2d 280 (S.D.N.Y. 2005) (finding that “direct physical loss or damage” is unambiguous and requires direct physical damage to insured property).
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