What Is Property Damage?

In business insurance, property damage is damage to the property of a business, including its contents, or the property of a third party.

Learn more about property damage and how it's covered by business insurance.

What Is Property Damage?

Property damage typically involves physical damage to tangible property. Tangible property is something that can be touched or felt like a building or computer monitor.

Most property damage claims involve physical injury to tangible property owned by the person making the claim (the claimant). For instance, a building owner sues a plumbing contractor for damage caused by a fire that the plumber accidentally started while welding a pipe.

How Property Damage Works

Several types of business insurance cover property damage. For example:

• General liability insurance covers third-party damage claims
• Business auto policies cover third-party damage claims resulting from business vehicle use
• Commercial property insurance covers damage to a business' property due to an unexpected event like theft or fire

Commercial property insurance is often bundled into a business owners' policy (BOP), which offers general liability coverage, business interruption insurance, and property coverage.

Types of Property Damage

Most small businesses purchase a commercial general liability (CGL) policy to protect themselves from third-party property damage claims. The meaning of property damage as it applies to your policy is explained in your policy definitions, which is a section in your policy documents.

Many insurance carriers use standard policies offered by the Insurance Services Office (ISO), an insurance advisory organization. The ISO Commercial General Liability (CGL) Coverage Form contains the following two-part definition of property damage:

• 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.
• 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.

Both parts of the definition limit coverage to tangible property. The first point covers physical injury to tangible property, including loss of use of that property. The second point covers the loss of use of tangible property that hasn't been injured. When a claim involves loss of use, the loss of use is assumed to have occurred at the same time as the property damage or occurrence that caused it.

Loss of Use

The first part of the definition of property damage includes loss of use of tangible property that's been injured. For example, the Bountiful Bakery hires Able Appliance to repair a malfunctioning steam cooker. An Able employee is working on the cooker when they accidentally cause a steam explosion. The explosion doesn't affect the cooker but damages a doughnut maker situated nearby. The doughnut machine is unique and replacement parts are difficult to obtain. Repairs take six months.

The Bountiful Bakery sues Able Appliance for the cost to repair the machine and loss of use. Bountiful has lost the revenue it would have earned in doughnut sales had the machine been available. The value of the lost revenue represents the loss of use.

A loss of use claim can occur even if the claimant's property has not been physically injured. For example, Dave owns the Delish Diner, a popular restaurant. A crane contractor is using a crane to move a piece of equipment at a construction site across the street when the crane suddenly collapses. The Delish Diner is not damaged, but local police close the street until the crane is removed. The area remains closed to the public for two weeks.

While the crane contractor has not caused any physical damage to Dave's property, its negligence has caused the diner to lose two weeks of sales. Dave sues the contractor for loss of use, demanding compensation for the lost sales.

Commercial Vehicle Property Damage

A commercial auto policy covers both property damage and physical damage. Property damage means damage to property belonging to a third party and is covered under commercial auto liability coverage. Physical damage generally means damage to a vehicle owned by the policyholder. Physical damage is insured under comprehensive and collision coverages.

In an ISO Business Auto Policy, property damage means damage to or loss of use of tangible property. This definition doesn't distinguish between injured and uninjured tangible property, as most auto liability claims involve tangible property that has been physically injured.

Commercial Property Damage

Commercial property insurance protects your business property and contents if you experience damage due to theft, vandalism, riots, or unexpected disasters like fire or high winds. You can purchase standalone commercial property policies or BOPs. These policies typically exclude property damage due to floods and earthquakes, so you'll need a separate policy or endorsement to be protected from those events.