8.1.3 Property Damage

• Jurisdiction: Arizona

The standard CGL policy defines "property damage" in terms of injury to tangible property, including loss of use. The standard policy provides:

"Property damage" means:

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.^[38]

The determination whether a claim for property damage is being made, as defined by the policy, will depend upon how the courts characterize the nature of the loss. If the court analyzes the nature of the claimed property damage in terms of lost profit and expectancy, then the court will find that no covered property damage has occurred under the policy. Instructive on this issue are McCollum v. Insurance Co. of North America^[39] and Travelers Indemnity Co. v. State.^[40]

In McCollum, the insured made negligent misrepresentations to buyers of unimproved lots, which resulted in diminution of their value. Specifically, the insured failed to improve the property through the installation of roads and utilities. The court held that the loss of speculative profits from land investments as a result of the insured's negligent misrepresentations were not covered under the insured's general liability policy. Similarly, in Travelers Indemnity, the investors in Lincoln Thrift Association and United States Thrift Association filed a class action suit against the State of Arizona for the latter's failure to properly regulate and supervise the associations, as required by law. The state sought to have its insurance carrier provide a defense under the terms of a public liability policy issued to it by Travelers Indemnity. Travelers refused to defend and filed a declaratory judgment action. Travelers filed a motion for summary judgment on the basis that there was no coverage under its policy because the character of damages sustained by the investors did not constitute tangible property damage, as required by the policy. The state argued that the depositors suffered a loss of money, that money was tangible, personal property, and that, therefore, the depositors' suit was for loss of tangible, personal property. Travelers responded to this argument by claiming that the depositors made an investment within the associations. The investment was not a bailment of money or valuables; rather, it became a chose-in action. Travelers maintained that chosen-in action was intangible property; therefore, the investors did not lose tangible property within the coverage definition of the policy. The court of appeals agreed with Travelers' position, stating:

We find the state's argument, that the investors' property is tangible because it is represented by an investment certificate, to be specious. There is neither injury to, nor destruction of, the investment certificate. Further, there is neither injury to, nor destruction of, the actual money invested. There is only the loss of the investment.

The general rule is that loss of investment is not injury to or destruction of tangible property. [Citation omitted.] We note that courts have found coverage of consequential damages, including loss of profits, but only where there is a direct physical injury to tangible property, folllowed by the consequential damages. [Citation omitted.]

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The claim here is for loss of both the investment and the expected profit thereon, whereas in McCollum [v. Insurance Co. of North America], the investors did not lose the investment (the land), but only the expected profit. However, in both instances the expected profit was intangible property.^[41]

The court in Travelers cited with approval the California decision of Giddings v. Industrial Indemnity Co.^[42] In Giddings, three groups of plaintiffs sued two brothers who were involved in a bankrupt financial empire that had included Westgate California Corp. and United States National Bank. In one suit, the shareholders of USNB sought the value of their holdings; in the second, a bank sought recovery for funds paid for capital notes of USNB; in the third, trustees of Westgate sued for alleged "looting" of the corporation by the defendants. The defendants sought defense and coverage from two insurance carriers. One of the carrier's policies defined property damage as "physical injury to or destruction of tangible property." The other defined property damage as "loss of or direct damage to or destruction of tangible property." After the insurers declined their tenders of defense, defendants sued the insurers for wrongful failure to defend. The court saw the key issue as whether the original plaintiffs had sought to recover for property damages covered by the policies, i.e., whether the damages were to tangible or intangible property. The court in Giddings stated:

Here the policies contain three different definitions of "property damage," but the policy provisions have one critical element in common: liability for "property damage" is covered only if some destruction of or injury to or loss of use of tangible property has occurred. Understood in its plain and ordinary sense, "tangible property" means "property (as in real estate) having physical substance apparent to the senses." [Citation omitted.] To construe the explicit words "tangible property" to include intangible economic interests and property rights requires a strained and far-fetched interpretation, doing violence to the plain language of the policies. Such an interpretation would rewrite the policies to fasten on the insurers a liability they have not assumed.^[43]

The court further stated:

Moreover, strictly economic losses like lost profits...