Coverage Analysis
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PROPERTY DAMAGE

Under pre-1973 policies, a reduction in property value resulting from the incorporation or installation of a defective product furnished by the insured constitutes "property damage"  whether or not it results in physical damage to the structure as a whole. Geddes and Smith, Inc. v. St. Paul Mercury & Indem. Co., 51 Cal.2d 558, 334 P.2d 881 (1959)(installation of warped and cracked aluminum doors was property damage to the entire building).  However, such claims will only trigger coverage under post-1973 policies if they result in physical harm to third party property.  Giddings v. Industrial Indemnity Co. et al., 112 Cal. App.3d 213, 169 Cal. Rptr. 278 (1980). 

Damage must be tangible, injury to the commercial value of a product concept is not "property damage."  Gulf Ins. Co. v. L.A. Effects Group, 827 F.2d 574, 577 (9th Cir. 1987) and Schaefer/Karpf Productions v. CNA Ins. Co., 64 Cal.App. 4th 1306, 76 Cal.App.2d 42 (2nd Dist. 1998).    These cases were cited approvingly by the Supreme Court in ruling  that a liability insurer does not owe coverage for an easement dispute.   In Kazi v. State Farm Fire & Casualty Company, 2001 Cal. LEXIS 22 (Cal. January 18, 2001), the court drew a distinction between damage to the land, which would be covered, and a claim for economic loss involving the inability to use the land, declaring that lost rights are in the nature of an intangible property claim that is outside the scope of CGL coverage.

The California Court of Appeals ruled in International Paper Company and Masonite Corporation v. AESLIC, No. A089102 (Cal. App. April 12, 2001) that the presence of allegedly defective Masonite hardboard siding was subject to the policies’ “own property” exclusion.  The court rejected the insured’s contention that the “incorporation doctrine” mandated coverage.  Instead, following the reasoning of the federal district court in Seagate Technology, the First District affirmed the general rule that in order for the incorporation doctrine to apply, “there must be a physical linkage or integration of the two products such that separation is not reasonably possible” so that damage to the insured’s property necessarily therefore also involves damage to the entity as a whole.  Contrariwise, the mere incorporation of a defective component into a whole does not mandate a finding that there is third party property damage.  The court declined to find that the incorporation doctrine is necessarily limited to claims involving inherently hazardous materials, however.

The California Court of Appeal has ruled that various suits by property owners against a developer fell outside the scope of coverage for “property damage” or “personal injury” being based on contract.  In Stein-Brief Group, Inc.  v.  Home Indemnity Co., 65 Cal. Appl 4th 364 (1998), the court held that what is relevant to coverage is whether the duty that gives rise to liability is independent of the contract or rests upon it.  The fact that the insured was alleged to have been negligent in performing its contractual duties failing to deliver a lot suitable for construction is not a sufficient basis for establishing coverage.  Further, the court declared that California case law establishing this principle in the context of property damage had equal application to claims for “personal injury.”  The court pointed out that the “wrongful entry” coverage only applied to “tort claims arising out of  the interference with an interest in real property.”  In any event, the court declared that there could not be coverage based on an “other invasion of the right of private occupancy”, as the alleged transgressions occurred while their properties were in the preconstruction stage and had not yet been occupied.  “Such language denotes disruptions of an ability of a landowner to actually occupy his property, not mere injuries to property.”  

Delays and increased costs in home construction are pure economic damages and do not present a basis for claiming “property damage.”  American International Bank v.  Fidelity & Deposit Co., 49 Cal.  App.4th 1558 (1996).

Pure economic losses, such as loss of good will, injury to reputation, lost profits and investment opportunities were not covered absent some preliminary proof of an actual injury to tangible property. Warren v. Fire Ins. Exchange, 230 Cal. App.3d 1029, 1034, 281 Cal. Rptr. 635 (1991); Giddings v. Industrial Indemnity Co., 112 Cal. App.3d 213, 169 Cal. Rptr. 278 (4th Dist. 1980); Safeco Ins. Co. v. Andrews, 915 F.2d 500 (9th Cir. 1990) (condominium unit owner's suit against the previous owner for misrepresentations and fraud in the sale of the condominium is a claim for economic loss only, i.e., the difference between the purchase price of the unit and its actual value, and not for "property damage");  Devin v. United Servs. Auto. Assoc., 6 Cal. App. 4th 1149, 1161, 8 Cal. Rptr.2d 263, 271 (1992) (homeowners claims for intentional and negligent misrepresentation resulting in a reduction in the fair market value of their property alleged economic loss only and not "property damage"); Allstate Ins. Co. v. Interbank Financial Servs., 215 Cal. App.3d 825, 830, 264 Cal. Rptr. 25 (1989) ("strictly economic loss, like lost profits, loss of goodwill, loss of the anticipated benefit of a bargain and loss of an investment, do not constitute damage or injury to tangible property covered by a comprehensive general liability policy"); Warner v. Fire Ins. Exchange, 230 Cal. App.3d 1029, 1034, 281 Cal. Rptr. 635 (1991) (economic damages arising from the insured's misrepresentations do not constitute damages to tangible property);  Devin v. USAA, 6 Cal. App. 4th 1149, 1161 8 Rptr.2d 263, 271 (1992) (homeowners claims for intentional and negligent misrepresentation resulting in a reduction in the fair market value of their property alleged economic loss only and not "property damage"); Fireman's Fund Ins. Co. v. National Bank for Cooperatives, 849 F.Supp. 1347 (N.D. Cal. 1994)(economic loss resulting from failure to disclose true condition of warehouse filled with rotting peanuts was not "property damage" since misrepresentation was not cause of loss).

Such claims are also deemed to be outside the scope of general liability insurance under California law since Civil Code Section 3433 limits the recovery in real estate fraud actions to purely economic or "benefit of the bargain" damages.  As a result, since recovery is limited to "economic loss", such claims have been held not to seek recovery for "property damage."  Allstate Ins. Co. v. Miller, 743 F.Supp. 723, 726 (N.D. Cal. 1990) and Allstate Ins. Co. v. Chaney, 804 F.Supp. 1219 (N.D. Cal. 1992).

Suits against a videotape distributor arising out of a massive product recall occasioned by its inadvertent marketing of thousands of duplicate copies of "The Best Christmas Pageant Ever" videotape without first erasing pornographic movies that had earlier been copied onto the videotapes have been held not to set forth a claim for "property damage" as there was no "physical injury to tangible property."  In Schaffer/Karpf Productions v. CNA Insurance Companies, 1998 WL 324725 (Cal. App. June 18, 1996), the Second District took note of the fact that the offensive material had been added onto duplicate copies and had not damaged the plaintiff's master tape.  Further, the court refused to find that the "lack of customer acceptance" for the altered product was a covered "loss of use."

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