READERS' FEEDBACK

Rough Notes, Apr 2005

Is theft of property "loss" or "damage"?

In Donald Malecki's December 1991 "Risk Management" column, he wrote an article titled "Property Does Not Have to be Damaged for PD to Apply Under CGL." I have used that article many times in arguing that coverage should apply for theft of property by contractors' employees. For purposes here, I am now referring to that part of the article relating to "loss of use of property that has not been physically injured."

I was wondering whether Don Malecki would be willing to comment on a related issue. Specifically, whether theft under a property policy constitutes "direct physical damage." The kind of theft I have in mind is where someone walks up to a display counter, pockets an expensive piece of property and walks away. The store owner sees the theft occur but the person gets away. No damage to any other property takes place. The question is whether theft constitutes "direct physical damage."

It is my contention that it does and that is why the commercial property policies using the "open perils" or "special form" provide coverage for this type of loss. My rationale is that, while no property suffered structural damage, the theft constituted "direct physical damage."

-Thomas E. Nelson, CIC, CRM, ALCM

Hallmark Insurance Associates, Inc.

Fresno, California

Don Malecki responds:

Since the insuring agreements of most commercial property policies refer to direct physical loss or damage, and there are differences between the two, one does not have to prove physical damage. Given that theft of property is a covered cause of loss or at least not an excluded cause of loss, the lost property would be considered as a (direct) physical loss rather than (direct) physical damage.

In fact, theft of property is not direct physical damage, because it cannot be proved to be physically damaged. It could, of course, be damaged eventually. But simply pocketing someone else's property and nothing else does not appear to meet the condition of damage. Without question, however, the unlawful taking of property is a physical loss.

In either case, the property is physical. The distinction is with respect to whether theft is loss or damage and, personally, it means loss.

It is not good to prove a property loss by using liability policy language or reasoning, or to show a covered liability claim for damages by relying on property insurance terminology. (This is sometimes done by lawyers who have nothing on which to rely in making their case.) Simply to make the point about the distinction between damage and loss, however, the 1991 article, referred to here, pointed out that property damage under a liability policy does not have to be damaged for coverage to apply. The reason is that the term "property damage" is commonly defined not only as physical injury to or the destruction of tangible property, but also loss of use of tangible property not physically injured.

In fact, it is because of the second definition that some insureds have been able to obtain liability coverage because of theft of property caused by the insured's employees. Were it not for this second definition, any such argument would likely be more difficult, although when that second definition was first introduced in 1966, it was said to always have been intended. This is not to say that every theft of property by an insured's employee would be covered. It is saying that in the proper fact pattern, there may be coverage simply because theft of tangible property is considered to be loss of use of tangible property not physically injured.

Thus, reference to physical loss under a property policy is similar to loss of use of tangible property not physically injured under a liability policy. Likewise, physical damage under a property policy is similar in concept to physical injury or destruction under a liability policy. For purposes of this question, it also must be remembered that physical loss means something different from physical damage under a property policy.

Having said all of this, however, it also needs to be mentioned that the way some property policies are drafted, it is not necessary to make this distinction because all coverages and exclusions are based on both physical loss or damage. But if one had to choose between the two, in a question dealing with theft of property, physical loss would be the answer.