A typical CGL policy covers the “loss of use” of property as one form of “property damage.” If a contractor or product manufacturer performs defective work or provides a defective product to a factory, and the factory goes in and out of service, or operates inefficiently or at less than capacity, there is a “loss of use” under the policy. A claim by the factory owner may be covered under the contractor’s or manufacturer’s CGL. The main obstacle to coverage will be whether the “impaired property” exclusion applies.
The “impaired property” exclusion is extremely complicated, with specific requirements before it applies, and several express exceptions. The exclusion excludes a claim for “loss of use” if the loss of use is caused by a defective product or work and the property can be “restored to use by repair [or] replacement” of the product. For example, if an aircraft is grounded due to a bad part, the “loss of use” of that aircraft is not a covered loss if replacing the part fixes the problem. If the part is simple to replace (like a spark plug) the exclusion clearly applies; but disputes arise where the repairs are more extensive.
Insureds have long argued the exclusion is limited to the “spark plug”- type situation, and that the exclusion does not apply if there are rip-out costs or more extensive repairs. There has been little industry commentary on this point however, and little case law.
A recent case from the First Circuit Court of Appeals, Essex Ins. v. Bloomsouth Flooring Corp., however, makes clear that the impaired property exclusion applies only if the property can be restored to use “simply” by replacing the product. Bloomsouth involved a loss of use of a building due to a pervasive odor from new carpet. In finding the exclusion inapplicable, the court pointed to allegations that, in addition to replacement of the carpet, work was done to the sub-floor and that special air filters had to be installed in the ventilation system. Bloomsouth makes clear the exclusion only applies where simple replacement of the work or product itself—without more—restores full use.
Bloomsouth is also a helpful reminder that a “loss of use” can take many forms, including problems like odor, excessive noise, reduced functionality and other forms of less than optimal use, as well as complete losses of use. We’ll do a blog post in the near future discussing this in greater depth.