Most of the time, when a claim is about “property damage,” nobody is really fussing about the property damage part.  In other words, while there may be coverage issues in dispute, one of them is probably not whether the collapsed building or contaminated soil is “property damage.”  We know it’s “property damage” because we can see with our eyes that (1) it’s property; and (2) it’s damaged.   

But there’s another type of “property damage.”  And this kind is not always so obvious.  The standard definition of “property damage” includes, in addition to “physical injury to tangible property” -- the kind that’s easy to see -- “loss of use” of tangible property.  And that’s loss of use of tangible property that has been physically injured and loss of use of tangible property that has not been physically injured. 

The “loss of use” kind of “property damage” gets nowhere near as much attention as its cousin, the physically injured.  But, ironically, while the standard definition of “property damage” includes 65 words [not counting the electronic data bit], only 5 of them are applicable to physical injury-based “property damage.”  In other words, 85% of the definition of “property damage” is focused on the less common “loss of use” component.   

While “physical injury to tangible property” can usually be seen or measured – which is why it’s usually not a source of squabble -- it is not always the same for “loss of use”-based “property damage.”  Whether property has been damaged, because it has sustained a “loss of use,” can be esoteric and not have a visibility component.  Is loss of value “loss of use”?  Are lost profits “loss of use”?   These questions can lead to disputes. 

The can-be squishy nature of “loss of use”-based “property damage” was on display in Scottsdale Insurance Company v. Darke, No. 19-2225 (N.D. Cal. Nov. 22, 2019). 

At issue in Darke was coverage for a landlord, for a suit brought by tenants, who alleged that they had been displaced from their apartment because of its horrific conditions – no heat, no hot water, mice and rats, ceiling leaks and inoperable security bars on the windows.  The landlord ignored the city’s requests that it make repairs.  The city eventually “red-tagged” the property because it was not zoned for residential use and not habitable.

The landlord, the Darkes, sought coverage under general liability policies.  At issue was whether the complaint alleged “property damage,” based on “loss of use of tangible property not physically injured,” on account of the allegations that the tenant was forced out of her apartment because it was zoned for commercial and not residential use.  [The claims for constructive eviction were barred by a habitability exclusion.]

The court concluded that it was bound by the California Court of Appeal’s 2007 decision in Golden Eagle Ins. Corp. v. Cen-Fed, Ltd., that loss of use of a leasehold interest is not loss of use of tangible property.  In Golden Eagle, the court concluded that loss of rental income, and loss of use of leased space, is not loss of use of tangible property, as leasehold interests are not tangible property. 

Darke is not a long decision.  And it’s thin in the way of analysis.  For sure, there are umpteen better cases out there for demonstrating the challenges that can come from determining whether there has been “loss of use” of property.  But it makes the point that, when it comes to “property damage,” there is more than just the kind that can be readily seen.