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Vol. 7, Iss. 2
March 7, 2018

How Much “Loss Of Use” Is Needed For “Property Damage”?

Most general liability coverage cases, that address whether “property damage” has taken place, focus on the “physical injury to tangible property” aspect of the definition. That’s a more common scenario than whether there has been a “loss of use” of property (the other component of the definition of “property damage”). In addition, whether there has been “physical injury” is usually answerable with the naked eye (or with some assistance). You can see that a building is no longer standing or that water intrusion has caused damage. On the other hand, whether there has been a “loss of use” of property can be more esoteric. So, between “physical injury” cases being more common, thereby providing more guidance, as well as involving a more easily identifiable injury, it is not surprising that “loss of use”-based “property damage” cases can be challenging.

This was on display in Mid-Continent Casualty Co. v. Adams Homes of Northwest Florida, No. 17-12660 (11th Cir. Feb. 13, 2018). It is a construction defect case, but with an unusual aspect.

Putting aside the non-relevant corporate background, Adams Homes of Northwest Florida built homes on land that had originally been designed for golf courses and holding ponds. Homeowners sued Adams seeking damages for Adams’ alleged negligence in failing to ensure the installation of adequate drainage.

Adams sought coverage under a general liability policy issued by Mid-Continent. Mid-Continent denied coverage in 2009. Then, in 2015, Mid-Continent agreed to defend Adams, under a reservation of rights, after an 8th amended complaint was filed. Wow. Persistence.

Mid-Continent filed a declaratory judgment action. At issue was whether there was “property damage” alleged. The definition of “property damage” was the one frequently seen in CGL policies: “a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the 'occurrence' that caused it.”

As the District Court saw it -- there was no “property damage” alleged as there was no “physical injury to tangible property.” The court stated: “In none of the one hundred and forty-seven paragraphs . . . is it alleged that Adams did anything that physically damaged [Homeowners’] homes.”

The Eleventh Circuit concluded that it did not need to decide whether that was correct, as the lower court failed to consider the “loss of use of tangible property that is not physically injured” aspect of the definition of “property damage.”

The Homeowners alleged that, on account of the manner of Adams’s construction – on land meant for retainage lakes -- “the streets adjacent to their homes, and the common areas they have access to, are now prone to flooding,” which has made “[Homeowners’] ordinary use or occupation of their property physically uncomfortable” and “disturb[ed] the [Homeowners’] free use . . . of their property.”

As the Eleventh Circuit saw it, these allegations created a factual issue whether the Homeowners alleged “property damage” on a “loss of use” basis. Thus, Mid-Continent had a duty to defend Adams.

The Eleventh Circuit went to the dogs for guidance in reaching its decision. It turned to the 1999 Florida appeals court decision in McCreary v. Florida Residential Property and Casualty Joint Underwriting Association. There the court held that an insured’s failure to control, supervise, and confine its dogs to its own premises was an “ongoing clear and present danger to the health, safety and comfort of [a neighbor]” that ultimately rendered him “unsafe and insecure in the use and enjoyment of his own property.” This, the McCreary court held, created a factual issue as to the loss of use of the neighbor’s property.

The court analogized the situation faced by the homeowners with the dog-fearing neighbor in McCreary: “These allegations [by the homeowner’s], fairly read, create a factual issue as to loss of use. Mid-Continent contends water is relatively harmless, unlike the McCrearys’ dogs, which entered Rebalko’s property and ‘caus[ed] an immediate danger to [Rebalko] and his pets.’ But the absence of allegations that the storm water run-off is placing Homeowners in immediate danger does not counsel a different result. Physical discomfort in the use of property, like insecurity and unsafety in the use of property, raises the specter of loss of use. Although it is unclear whether the physical discomfort caused by the run-off is severe enough to prevent Homeowners from using their property, the same was true of Rebalko’s allegations in McCreary. Rebalko did not allege he stopped using his property because of the McCrearys’ dogs; rather, Rebalko alleged he felt insecure and unsafe in its use. Like Rebalko, Homeowners are entitled to have any ambiguity about whether the physical discomfort caused by the run-off was severe enough to cause loss of use resolved in their favor. If the allegations of the complaint leave any doubt as to the duty to defend, the question must be resolved in favor of the insured.”

The take-away: In essence, at least for duty to defend purposes, the court read “loss of use” of property as “loss of enjoyment” of property.

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