Yesterday’s post, "A Law Professor Asks: Is The Reasonable Expectations Doctrine Dead?," may have reached a conclusion too quickly. A recent article in the American Bar Association‘s journal, Coverage, from the Committee on Insurance Coverage Litigation has an excellent article suggesting that the reasonable expectations doctrine still has life.
In "What Does "Physical Damage" Mean When It Doesn’t Work? “Physical Damage" as Loss of Function, Value, or Use in Liability and First Party Coverage," authors Sherilyn Pastor and Jerry Sattin wrote an article that is a must read for coverage attorneys and all first party property adjusters. The article’s genesis was the recent New Jersey decision, Wakefern Food Corporation v. Liberty Mutual Fire Insurance Company, 968 A. 2d 724 (N.J. Sup. Ct. App. 2009).
Just to show that New Jersey Appellate Courts may follow the "reasonable expectations" doctrine, the Wakefern court concluded that the:
…undefined term ‘physical damage’ was ambiguous and that the trial court construed the term too narrowly, in a manner favoring the insurer and inconsistent with the reasonable expectations of the insured.
The article lists a number of unique cases where "physical damage" was found to include loss of use, function or value. Indeed, while I suggest these case decisions are unique, the authors noted:
…courts frequently have been confronted with cases in which the concept of "physical damage" is less clear. Is a house perched on a cliff after a landslide removes the supporting earth "physically damaged" if the house is otherwise intact and unscarred? Is juice "physically damaged" when its bottle’s expiration date has passed even though there is no proof that the beverage has otherwise spoiled? Is computer equipment "physically damaged" when its software is lost after a power failure even though the computer otherwise functions? Is an electrical system "physically damaged" during a power outage if circuit breakers trip to protect the electrical equipment from "physical damage?"
Their conclusion following the legal analysis is significant and suggests that an insured’s losses may include much more than visible damage:
‘Physical Damage’ plays a central role in coverage determinations…as an element of ‘direct physical damage’ in first party coverage….While ‘physical damage’ may be obvious where visible-as with a dented fender or a burned building-it is often less obvious where the involved property is visibly unmarred but nevertheless has lost its value or ability to function. Typically, as in Wakefern, the damaged property is physically incapable of working-either because it lacks power or because it is physically contaminated by fumes, asbestos, or other substances. But in other cases, such as where a product has lost some or all of its value due to government regulations, expiration dates, or otherwise, it too may be deemed physically damaged because of the change in perception of the product.
In short, ‘physical damage’ is not an inflexible concept connoting only visible damage and material destruction. In the appropriate circumstances, it also is a flexible concept and may be equated with loss of use, function or value. Policyholders and insurers therefore should regard the term broadly and flexibly as commonsense and the law of various jurisdictions require.
This article will undoubtedly raise a number of questions because the reported cases affording these recoveries are limited. Yet, the article suggests the granting of coverage is fairly commonplace. We will follow up with case examples granting and denying coverage in future posts.
I will also partially retract what I wrote yesterday and contemplate greater use of the "reasonable expectations" doctrine–at least when I am in a New Jersey court.