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Is Theft "Property Damage" Under a CGL Policy?

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VU Faculty
Abstract
Property was stolen from a guest's auto in the insured hotel's self-parking garage. The guest made a negligence claim against the hotel. The adjuster has denied the claim on the basis that, under state law, theft is not included in the definition of "property damage." If the guest sues, the adjuster says no coverage, no defense. True or false?

Question"The insured is a hotel. Personal property was stolen from a guest's vehicle in the insured's self-park garage. The carrier stated that under the definition of "property damage" under the CGL that, in Indiana, theft is not included in the definition of property damage. So the carrier is stating that "theft" is not property considered property damage in Indiana. The carrier says that there are only four states in the country that define theft in the definition of property damage. Based on this, if the guest sues the hotel over the denial of his claim, since PD (theft) is not covered, then defense would not be provided to the insured. Is this correct?
"I received a denial letter from the carrier citing that there are only four states that recognize theft as property damage. They state that theft would be an 'economic loss' as there is no physical damage. They cite an Indiana court case of R. N. Thompson & Associates v. Monroe Guaranty Insurance Co. stating that this supports that there is no property damage to the items taken, that the claimant was presenting a claim for the value of his property taken and, as such, this is an economic loss not property damage. Thompson v. Monroe was a construction defect case...this isn't comparing apples to apples or is it?"
Answer?This is a puzzling and troubling denial. We ran this by the VU faculty and their responses are below. Following their comments, we reference several articles written by VU faculty member Don Malecki who is one of the foremost CGL experts in the country, along with commentary from Rick Pitts, an Indiana attorney and counsel to our Indiana state association.
Faculty Response
I am not sure of the legal issue. There are others who can more appropriately reply to that. But the CGL defends the insured for lawsuits that claim damages (property damage) arising from the insured's acts or failure to act, as long as the policy does not exclude the situation. Property in the car of a guest should not be considered in your insured's care, so the personal property of others in the insured's care exclusion would not apply. If there is not a legal interpretation that removes this loss from the definition of property damage, this should be defended by the CGL. The assumed negligence on the part of your insured is failure to provide a secure premises for guests.
Faculty Response
Is this alleged definition of "property damage" based on case law involving claims of this type or on a statute? If the latter, is this statutory definition applicable specifically to insurance contracts? If not, then it probably doesn't apply. Just because a term is defined by law to mean something within the context of that law doesn't mean that the definition can be translated to everything else.
An insurance policy is a contract. Contracts can define terms just about any way they want to as long as they don't violate public policy. Many state laws may define "auto." Here is how the term is defined in one insurance policy:
"Auto" means a land motor vehicle, trailer or semitrailer designed for travel on public roads, including any attached machinery or equipment.
An adjuster cannot deny a claim because the policy definition of "auto" does not match perfectly with a state law defining the term relative to licensing or some other purpose. The parties to the contract are free to define the meaning of terms within that contract any way they see fit. The definition of "property damage" in the CGL is clear and unambiguously applies to the theft of property.
Ask the adjuster to provide you with a copy or citation of the law. I'd be very interested in seeing if it has any applicability to a CGL claim. I'm betting it doesn't.
Faculty Response
Here's how the CGL defines "property damage":
17. "Property damage" means:
a. 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; or
b. 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.
For the purposes of this insurance, electronic data is not tangible property.
As used in this definition, electronic data means information, facts or programs stored as or on, created or used on, or transmitted to or from computer software, including systems and applications software, hard or floppy disks, CD-ROMS, tapes, drives, cells, data processing devices or any other media which are used with electronically controlled equipment.
Without knowing the legal precedent cited by the company, the question is why isn’t theft “loss of use of tangible property that is not physically injured”? The definition is part a. OR b. of the definition.
Faculty Response
Theft is considered to be loss of use of tangible property not physically injured. In other words, theft is considered to be with the second definition of property damage. There are several cases that have upheld coverage. Two of the cases upholding liability coverage for theft of property of others not in the care, custody or control of the named insured by employees are: Chertok v. Hotel Salisburg v. Federal Insurance Co., 516 F. Supp.766 (1981) and Travelers Ins. Co. v. De Bothuri and P.L.A., Inc., 465 So. 2d 662. There have been other such cases. Some insurers have since included an exclusion in their CGL policies to eliminate the chances of coverage. Those who don't would rather fight than switch, hoping to outlast (monetarily) those who are seeking coverage. And that is the way it goes in this business.

Faculty Response
I presume this is the Thompson v. Monroe case they're referring to:

This is, as you say, a faulty workmanship claim under a CGL policy and has nothing whatsoever to do with a theft claim. There is no mention of theft and I can only presume they are extrapolating this decision to include losses based on theft. If so, their reasoning is mystifying. The claimant's property is gone. It doesn't matter to him whether his loss was caused by someone taking the property or pounding it into dust with a sledgehammer, it's gone. If he alleges that your insured is legally liable for such "property damage," then the carrier is obligated to defend or petition the court for a declaratory judgment releasing them from the claim.

The subject of the court case they reference is a completely different issue that this VU article:

At the end of the article is a listing of other articles that discuss the "economic loss" doctrine they reference which, again, has nothing to do with a theft claim as you describe to my knowledge. Also included in the article is a chart showing case law by state which includes the R.N. Thompson case under the Indiana listing. Again, as you say, this case deals with construction defects and faulty workmanship. I see not even a remote applicability to the case at hand.

The CGL policy defines "property damage" as follows:

"Property damage" means:

a. 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; or

b. 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.

As a worst case scenario, the claimant's property has been physically injured because it no longer exists from his perspective. Even if you were to argue that it hasn't been physically injured, "property damage" includes "Loss of use of tangible property that is not physically injured," which is certainly the best case scenario here.

 

Additional Commentary:

Attorney Rick Pitts, general counsel for the Independent Insurance Agents of Indiana, provided the following comments:
Indiana Code 32-33-7 addresses “Liability of Hotels for Loss of Property of Guests.” This chapter of the Indiana Code creates some significant limitations on the liability that a hotel owner / operator can have for guest property. The chapter of the Indiana Code does NOT address the insurance implications of that liability – in other words, the Indiana statute does not address whether or not the hotel owner’s liability is “property damage” under the CGL.
I have conducted brief research on reported Indiana decisions involving hotel owners and innkeeper’s liability. I don’t find anything that would put Indiana outside the norm in terms of the nature of the liability – nothing that would convert it from being a “property damage” claim into one that is not.
No carrier to my knowledge in Indiana has ever taken the position that Thompson speaks to anything about a theft loss. The most that can be said for Thompson from the carrier's perspective is that faulty workmanship (by itself) is not an "occurrence," but that has absolutely nothing to do with a theft claim. I will say that the carriers have been reading Thompson quite aggressively here in Indiana, but again this is the first time I have encountered an attempt to apply it outside of construction claims.

Faculty Response
Here are several articles related to this subject by Don Malecki from his Rough Notes column:

Look Beyond the Obvious Coverage Option to Find Alternative Coverage, Rough Notes, July 1998

"A review of the hotel's insurance portfolio revealed a commercial general liability policy with limits far in excess of the total loss. The task was to convince the insurer that the CGL policy covered theft of property as property damage. Some people may think that it is impossible for a liability policy to cover theft losses for which an employer is responsible. However, that idea was put to rest with this columnist's article in the December 1991 issue of Rough Notes, titled 'Property Does Not Have To Be Damaged For PD To Apply Under CGL.' [Note: We were unable to find a copy of this article available via hyperlink. - Ed.]

"Briefly, the article mentioned that personal property lost or stolen is considered to be loss of use of tangible property not physically injured. There are cases supporting that opinion. The article went on to explain the obstacles sometimes raised by insurers, and how they could be overcome-given the proper fact pattern."

CGL is Versatile in Unusual Claim Situations, Rough Notes, June 1999

"Briefly, theft of tangible property is considered to be property damage of the second type defined in the CGL policy-that is, loss of use of tangible property that has not been physically injured. That is a well known fact, and it can be substantiated by many court decisions."

"Employee Dishonesty" Isn't Always What It Seems, Rough Notes, November 2005

"Some people overlook this policy as a means of protection, based on the assumption that theft of property is not property damage. The mistake here is thinking of property damage in its generic sense; that is, where there is some physical injury or damage.

"What must not be overlooked, however, is the two-pronged definition of 'property damage.' The first one concerns physical injury or damage to tangible property. When property is stolen, it is not physically injured. It actually is the second part of that term's definition that is important, because it concerns loss of use of tangible property that is not physically injured.

"In fact, in the case of Travelers Insurance Company v. De Bothuri and P.L.A., Inc., 465 So. 2d 662 (Fl. App.1986), both parties ultimately agreed that coverage for theft arises only out of the second definition of 'property damage.' This case involved an individual who sued for negligence because of theft of her personal property. The case does not explain the circumstance of the claim, but it arose when the insurer filed a declaratory judgment action seeking, interestingly, to determine if theft was covered under the definition of property damage."

Is Theft of Property "Loss" or "Damage"?, Rough Notes Readers' Feedback, April 2005

In this Q&A segment, Don Malecki responds to a specific reader question about whether theft under a CGL would be "loss" or "damage."

Faculty Response
Theft is property damage under a CGL but it is not covered. The policy specifically excludes personal property of others in the insured's care, custody and control. So even if you prove negligence in this situation no coverage attaches. To provide coverage purchase innkeepers legal liability. This provides coverage subject to determination under various state laws that establish the legal liability of innkeepers by statute.

I am not sure what the problem is on this one. Does anyone think a bank CGL will reimburse me for a robber taking my rings and watches while he steals money from the bank? Come on guys let's get real.

Faculty Response
I don't think simply being on the premises of a hotel or a bank establishes that your property is in the "care, custody or control" of the premises owner or operator. It could be, but not necessarily. I'm sure there's a lot of case law on this. Here's something I Googled from Georgia, though it's inconclusive and involves garage liability vs. garagekeepers:

http://caselaw.lp.findlaw.com/cgi-bin/getcase.pl?court=11th&navby=case&no=948989opa

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