Earlier this week, Chip Merlin posted Does an Insurance Policy Cover only “Loss” or “Damage” to Property? regarding the different interpretations of the proverbial “loss” or “damage” provision in property insurance policies, specifically as applied in anticoncurrent causation analyses.

In the post, Chip commented:

When considering a policy that covers “accidental physical risks of loss,” I wonder what a “loss” would be if there were no “damage” that occurred with it. I cannot think of such a situation.

An avid reader commented:

A couple of scenarios come to mind where a loss has occurred but NO physical loss to the insured property has been sustained.

Referring to the ISO Homeowners program the coverage for Civil Authority comes to mind where ALE costs would be paid even if there is no physical damage to the insured property.

Another situation may be a municipal water source which is contaminated and a coffee shop/restaurant is shut down because of it. The water is not insured (at least not before it runs through the meter) yet there may be a Business Interruption claim as a result.

To which Chip responded:

Thanks for your comment. I think there is a “physical” damage or loss component to each.

The ISO business income form CP 00 30 04 02 promises to pay “for the actual loss of business income you sustain and necessary extra expense caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any covered cause of loss.” So, the form itself refers to “physical” damage or loss.

Under ISO homeowners forms for loss of use, those state that if “a civil authority prohibits you from use of the `residence premises’ as a result of direct damage to neighboring premises by a Peril Insured Against, we cover the loss as provided in 1) additional living expense and 2) fair rental value above for no more than two weeks.” Again, the “direct” damage is meant to be “physical” albeit to the neighbors policy.

This “loss or damage” debate is also highly litigated in business interruption claims. The opinion in Philadelphia Parking Authority v. Federal Ins. Co., 385 F.Supp.2d 280 (S.D.N.Y. 2005), is illustrative. In this case, a Pennsylvania state-created agency that operated a parking facilities at Philadelphia airport sued its property insurer for certain business losses sustained when the FAA grounded all civil aircrafts after the 9/11 terrorist attacks.

The parking authority presented a claim under its Business Income, Contingent Business Premises, and Civil Authority Provisions of the policy. The carrier denied business interruption coverage stating that no “direct physical loss or damage” had occurred “to the insured premises.” The carrier further denied coverage under the Civil Authority Provision stating that there was no direct nexus between the physical loss or damage (that occurred in DC, New York and Western Pennsylvania) and the closure of the airport and the parking facility in Philadelphia.

The parking authority argued that the claim was covered under its Business Income and Contingent Business claim, contending that the phrase “direct physical loss or damage” is ambiguous because it is unclear whether “direct physical” modifies “damage” as well as “loss” and that therefore the Court should construe the phrase in Plaintiff’s favor and read the word “damage” to include economic damage. The court rejected this argument and held that:

[i]f Plaintiff’s proffered interpretation of the language were correct, the Provisions’ requirements would be unreasonable as applied to a business interruption claim based on purely economic damage. As discussed above, an insured making such a claim would need to show not only that the economic damage (to either the insured’s covered property or a contingent business premises) resulted from a “covered cause of loss,” but also that the economic damage itself caused the interruption in the insured’s business operations. It is difficult to imagine such a situation actually taking place. Moreover, it was clearly not the situation here.

However, if, as Defendant argues, “direct physical” modifies both loss and damage, the Provisions’ requirements make sense: the interruption in business must be caused by some physical problem with the covered property (or the contingent business premises), which must be caused by a “covered cause of loss.” For example, if an insured business had to temporarily close its store because of structural damage caused by a fire, the Business Income and Extra Expense Provision would clearly cover the resulting losses. In that instance, the “direct physical loss or damage” would be the structural damage, and the “covered cause of loss” would be the fire. Thus, the Court will not adopt Plaintiff’s “torturing the phrase” merely to create an ambiguity which does not exist when the contractual text is read in context and its words construed in their commonplace meanings.

With respect to the Civil Authority provision, the parking authority argued that the FAA’s order grounding civil aircrafts “effectively prevented ingress and egress of passengers into terminal areas of the airport and the parking facilities” and, as a result, there was a severe reduction in business. In this case, the court held that:

The plain language of the [FAA order] did not “prohibit[ ] access to” Plaintiff’s garages as the policy requires. The NOTAM was issued to the attention of “all aircraft operators,” and deals only with the grounding of airplanes. While this unprecedented order may have temporarily obviated the need for Plaintiff’s parking services, it did not prohibit access to Plaintiff’s garages and therefore cannot be used to invoke coverage under Plaintiff’s policy.

Since the [FAA order] did not prohibit access to Plaintiff’s garages, it is unnecessary for the Court to decide whether the FAA issued the NOTAM “because of” the damage caused by the plane crashes in New York, Washington D.C., and Pennsylvania or, as Defendant argues, only to prevent additional terrorist attacks.

The question whether coverage is triggered by the mere existence of a “loss” without a finding of “damage” is one of the most debated causation dilemmas in property insurance coverage litigation. Philosophically, the “loss or damage” debate could be as difficult as the “chicken and egg” conundrum, but the mystery certainly keeps matters interesting.