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I. Introduction........................................................................................96
II. Historical Development of the "Physical Loss or Damage"
Requirement.......................................................................................96
III. The Meaning of "Physical Loss or Damage"....................................99
IV. Court Interpretations of "Physical Loss or Damage".....................102
A. Pure Financial Losses ................................................................102
B. Cosmetic or Aesthetic Changes.................................................104
C. Loss of Warranty........................................................................105
D. Loss of Merchantability..............................................................106
E. Loss of Functionality or Reliability...........................................108
F. Loss of Use from Threat of Damage, Lack of Access, or Lack of Power........................................................................111
G. Loss of Use from Bacteria, Odor, or Noxious Gases.................114
H. Asbestos and Lead......................................................................117
I. Mold............................................................................................120
J. Electronically Stored Data.........................................................121
V. Conclusion........................................................................................123
I.INTRODUCTION
Most property insurance policies require "physical loss or damage" to insured property as a threshold requirement for coverage.1 In most property damage losses, this requirement is easily met. When, for example, insured property is damaged by fire, water, or wind, there always will be a physical change or structural damage to that property. But when the insured property's structure is unaltered, at least to the naked eye, and the insured claims the property's value, usefulness, or functionality has been lost or diminished, questions arise whether coverage is triggered.
Courts have not uniformly interpreted the physical loss or damage requirement in these types of cases. Some courts, using the dictionary definition of "physical" as a guide, have found that physical loss or damage requires that the insured property suffer a distinct, demonstrable physical alteration or change. But other courts have determined that the loss of use, functionality, or reliability can, under specific circumstances, constitute physical loss or damage even in the absence of any demonstrable structural damage or other alteration to the insured property.
This article discusses how courts have interpreted and applied the physical loss or damage requirement. It begins with a brief history of the origin of the physical loss or damage requirement. Next, this article examines how courts have defined the phrase "physical loss or damage." It then reviews the cases that have addressed the physical loss or damage requirement in a myriad of fact patterns that have arisen. These cases illustrate that while in some circumstances courts uniformly apply the physical loss or damage requirement, in other circumstances courts have very different views of what constitutes "physical loss or damage."
II.HISTORICAL DEVELOPMENT OF THE "PHYSICAL LOSS OR DAMAGE" REQUIREMENT
The "physical loss...