Insurance Law Lesson 72: Biz Risks; Impaired Property

The next of the standard business risk exclusions precludes coverage for “property damage” (Lesson 24) to “impaired property” or loss of use of property not physically damaged when the damage is because of a deficiency or failure to complete the insured’s work or product.  But, the exclusion does not apply to collateral damage or after the work/product has been put to its intended use.


“Impaired property” means tangible property that either cannot be used, or is less useful because the insured’s product or work has been incorporated into it. There is a caveat. The defect in the property must be curable with by curing, replacing, or completing the insured’s contribution.


This is a lot to process. Here’s an example:


Acme Co. installs its defective product in Bob’s widgets. Now Bob’s widgets cannot be used, and Bob has to rent additional widgets until Acme’s defective part is replaced. If Bob sues Acme to replace the defective part and to pay for the loss of use of the widgets, this exclusion may apply to block coverage.


But, if Bob uses the widgets for a few weeks and then the defective parts fail, that would be outside of this exclusion. Similarly, if the defective part caused the widget combust, causing collateral damage, that would also not be precluded by this exclusion.


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