A Difficult Question to Answer: What Actually Is Its Purpose?
January 15, 2013
Summary: The reality of the matter is that the “impaired property” exclusion has had a troublesome path since its birth in 1966. The reason it is confusing to many people is that its purpose is generally misunderstood. It is supposed to apply when a claim does not involve physical injury to tangible property. However, whenever a claim involves property damage stemming from a named insured's product, the “impaired property” exclusion also is commonly cited by many insurers. As a result, there is no majority or minority standing concerning this exclusion, and it has to be taken into consideration just like other exclusions.
The evolution of the exclusion is discussed first, followed by how the exclusion has fared in the courts. The last part of this discussion provides a checklist of what should be taken into consideration for purposes of determining whether it is applicable or even germane to the issue.
Topics Covered:
Tracing the exclusion's evolution
Can the property be restored to use?
The temporal impact of “sudden”
The impaired property exclusion found in liability policies continues to cause a great deal of confusion, in part because the breadth and scope of its application is difficult to understand. A concern voiced by many is that some insurers are seeking to apply this exclusion to situations involving both physical injury to tangible property and also where there is loss of use of tangible property that has not been damaged. While the drafting history of this exclusion confirms that it is not intended to apply in cases when there is physical injury to tangible property, the exclusion's wording states otherwise. However, if one were to trace the evolution of this exclusion, the conclusion would be that the current exclusion—contrary to how it reads in policies—was intended to address solely those situations where there is an absence of physical injury.
Reference to the term “impaired property”, its accompanying definition and verbiage comprising the exclusion, were introduced into standard commercial general liability forms of the Insurance Services Office (ISO) beginning in 1986; both its definition and exclusion are discussed in more depth in these pages. For the moment, however, it is only necessary to mention that this exclusion is directed at those damages or costs associated with tangible property that cannot be used, or is less useful, when that tangible property (1) incorporates the named insured's product or work, or (2) the named insured fails to fulfill the terms of a contract—and that tangible property can be restored to use by the repair, removal, or replacement of the work or product, or by fulfilling the terms of the contract.
Tracing the Exclusion's Evolution
The grandparent of the current impaired property exclusion was referred to as the “design error” exclusion and first appeared in the 1966 CGL forms of the National Bureau of Casualty Underwriters as exclusion (k). This early version of the impaired property exclusion read as follows: This insurance does not apply to: . . . property damage resulting from the failure of the named insured's products or work completed by or on behalf of the named insured to perform the function or serve the purpose intended by the named insured, if such failure is due to mistake or deficiency in any design, formula, plan, specifications, advertising material or printed instructions prepared or developed by any insured; but this exclusion does not apply to . . . property damage resulting from the active malfunctioning of such products or work.
According to its1966 explanatory memorandum, ISO stated that the exclusion's purpose was to reinforce the premise that no coverage was intended for the business risk of a manufacturer or contractor whose product or work failed to perform the function or service. Two points are important here.
The first is that the exclusion was aimed at the business risk of a failure of the insured's product or work. Briefly, a business risk is a risk that is deemed to be solely under the control of the insured and, thus, not insurable. This is because insuring damage to the named insured's own work or product, or as in the case with this exclusion, the inability of the work or product to perform as intended, would eliminate or diminish incentive for the named insured to exercise caution and quality control in the process of manufacturing its product or performing its work.
The second point here is that the exclusion purports to apply to property damage. This term was first defined in 1941 with the official introduction of the standard liability forms to mean injury to or destruction of property. (It did not require physical injury or tangible property.) At the time the design error was introduced in 1966, the definition of property damage was redefined to mean injury to or destruction of tangible property. The 1966 definition of property damage was broader than subsequent definitions in that it was not limited to physical injury and, therefore, could have applied to any type of impairment, including loss of use in the absence of physical injury. As such, the design error exclusion could arguably have also been said to apply broadly to physical injury or simply where there is a loss of use of tangible property.
In fact, the drafters of the design error exclusion confirmed as much in explaining the application of this 1966 exclusion. As it turned out, exclusion (k), which attempted to distinguish between injury or damage by employees versus management errors, was too difficult to understand and was replaced in 1973 by a new exclusion (m) labeled as the “failure to perform” exclusion.
At the same time of this business risk exclusion in 1973, ISO also introduced a revised definition of property damage, meaning physical injury to or destruction of tangible property. To respond to concerns that earlier policies were not clear on whether coverage applied to loss of use of tangible property not physically injured, ISO also introduced an expanded version of property damage consisting of two parts. Part (a) of the definition addressed physical injury to tangible property, including all resulting loss of use. Part (b), on the other hand, applied solely to those situations where there was loss of use of tangible property in the absence of physical injury or destruction.
Parenthetically, ISO stated that its expanded version of the property damage definition was a clarification always intended. Given that the 1966 and earlier editions of liability forms referred solely to injury without the physical modifier, coverage accordingly should have applied to loss of use of property, even in the absence of physical injury. If that were the case, the design error exclusion also could have applied accordingly, which historically was not the case.
In any event, when the definition of property damage was again redefined in 1973, along with the introduction of the failure to perform exclusion (m), ISO stated in its explanatory memorandum that this new exclusion no longer applied to physical injury to or destruction of tangible property, including the loss of use of such physically injured property. Instead, the exclusion repeated below, was meant to be limited solely to loss of use of tangible property which has not been physically injured.
This insurance does not apply to: Loss of use of tangible property which has not been physically injured or destroyed resulting from a delay or lack of performance by or on behalf of the named insured of any contract or agreement; or the failure of the named insured's products or work performed by or on behalf of the named insured to meet the level of performance, quality, fitness, or durability as warranted or represented by the named insured.
But this exclusion does not apply to loss of use of other tangible property resulting from the sudden and accidental physical injury or destruction of the named insured's products or work performed by or on behalf of the named insured after such products or work have been put to use by any person or organization other than an insured.
While the intent of this exclusion was made clearer, the wording used was not without its problems. Sub-part (2), for example, has been viewed by some courts as applying only to situations involving breach of contract, an issue ISO sought to address in the wording of the current impaired property exclusion.
When it introduced the latest impaired property exclusion in 1986, ISO indicated that the coverage provided under this exclusion would result in substantially the same coverage as existed under the 1973 version. (Exclusions do not grant coverage. Traditionally, the method in determining coverage of liability policies is to infer from exclusions what is excepted and therefore, covered.) The wording of the impaired property exclusion, however, does not clearly limit its application to situations involving loss of use of tangible property not physically injured, as did the 1973 wording. The current impaired property exclusion reads:
m.Damage to Impaired Property or Property Not Physically Injured
“Property damage” to “impaired property” or property that has not been physically injured arising out of:
(1)A defect, deficiency, inadequacy or dangerous condition in “your product” or “your work”; or
(2)A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms.
This exclusion does not apply to the loss of use of other property arising out of the sudden and accidental physical injury to “your product” or “your work” after it has been put to its intended use.
This exclusion also must be read in conjunction with the definition of impaired property. Impaired property means: tangible property, other than “your product” or “your work” that cannot be used or is less useful because it incorporates “your product” or “your work” that is known or thought to be defective, deficient, inadequate or dangerous; or you have failed to fulfill the terms of a contract or agreement if such property can be restored to use by the repair, replacement, adjustment or removal of “your product” or “your work” or your fulfilling the terms of the contract or agreement.
The title of this exclusion, “Damage to Impaired Property or Property Not Physically Injured”, connotes, at first blush, something other than physical injury to tangible property. As mentioned subsequently, however, reference to property damage can confuse the situation because that term is also defined to mean physical injury to tangible property. While reference to property not physically injured is clear enough, however, reference to impaired property, as defined, is less so. Black's Law Dictionary, Second Pocket Edition (2001) states that the term “impair” means: To diminish the value of property or a property right. This reinforces the view that impaired property refers to property of diminished value, an economic loss as opposed to one involving physical injury to tangible property. However, Black's also defines the term “impairment” to mean: The fact or state of being damaged, weakened or diminished. Thus, the term “impaired property” can be argued to encompass damage, though it is unclear whether that term refers only to pure economic damage and diminished capacity, or also encompasses physical injury to tangible property.
The definition of impaired property also reflects an intent to encompass pure economic loss, but with wording that is not as clear as that used in 1973. The current exclusion applies to property damage to tangible property, other than the named insured's work or product. The problem is that if this exclusion is given effect to situations involving physical injury to tangible property (the first definition of property damage), virtually all coverage for property damage is eliminated, particularly in construction settings.
Consider, for example, the exclusions for damage to the named insured's work or product. While damage to that work or product is excluded, damage to the property of others caused by that work or product is supposed to be covered. However, if the impaired property exclusion were to be applicable to a situation involving physical injury to tangible property, damage caused by such work to the property of others would not be covered where that damage is due to the incorporation of the named insured's work or product, which can be repaired, removed, etc., or where it is due to a breach of contract. To put it bluntly, virtually all property damage in a construction setting could be argued to fall within the terms of this impaired property exclusion! This exclusion, furthermore, would be particularly troublesome in a wrap-up program, since all participants in such programs are named insureds and, therefore, would be subject to these exclusions.
Yet, this is the way some courts view the application. One such case is American Insurance Company v. Crown Packaging International, 813 F. Supp. 2d 1027 (2011). Briefly, in this case, Crown sold plastic containers manufactured by a wholly-owned subsidiary. One of Crown's largest customers, Ecolab, purchased these containers to package its liquid soap products. This case arose after Ecolab began to experience problems with some of the containers filled with soap. Before the problems were resolved, Ecolab had to manually inspect its inventory of containers, at the end of the manufacturing process, and dispose of, or rework the soap found in the defective containers. Reworking the soap involved removing it from the containers by cutting them off the solidified soap and then reblending the new material in batches. Ecolab eventually decided to dispose of the remaining defective containers filled with their product, instead of reworking the soap because the amount of defective material being dealt with was impacting its manufacturing process.
One of Crown's arguments, dealing with the impaired property exclusion, was that since Ecolab's soap was physically damaged, that exclusion did not apply. The court disagreed, stating that Ecolab's soap inside the containers was physically undamaged and remained in the condition Ecolab intended for it to be in, until Ecolab scrapped it. Ecolab's economic decision to throw out the undamaged soap, the court said, was not physical damage to the soap; the only damage that occurred was loss of use. But even if this were not the case, the court went on to explain, the [impaired property] exclusion nevertheless applied to property damage “to impaired property or property that has not been physically injured”. If it was necessary to specify that the exclusion applied equally to property not physically injured, the court added, then impaired property must also include property which might be physically injured. The court also explained that the policy's definition of impaired property, as tangible property that cannot be used, or is less useful, because it incorporates the insured's defective product, did not rule out physical injury to the tangible property. As American Insurance Company pointed out in its reply, the exclusion did not even come into play until there had been property damage, and property damage is either physical injury or loss of use.
The way the impaired property exclusion is worded, the court was right in how it interpreted the exclusion's application, even though that is not what is intended. That also is the reason why it is difficult to grasp the proper meaning of this exclusion. As other courts review and accept this kind of decision, the problem over the exclusion's proper application will continue to be confusing.
The purpose of the impaired property exclusion, as demonstrated by pronouncements issued by the drafter of the various versions, is to address business risks and to avoid covering pure economic losses. Unfortunately, the wording chosen to implement this intent has been revised in ways that allow insurers to engage in mischief-making during attempts to apply the current exclusion to all forms of property damage. Specifically, what can be confusing to both insureds and claims people alike is the exclusion's reference to property damage to impaired property. It is true that impaired property involves property damage, but solely to loss of use of tangible property not physically injured, and not to tangible property that has been physically injured. How the respective parties get to this point of confusion is when a situation involves physical injury to tangible property, they also turn to the impaired property to address the resulting loss of use, instead of referring to the first definition of property damage, which also includes resulting loss of use. As a result, insurers are sometimes arguing that a given loss involves not only physical injury to tangible property, including its loss of use (excluded when it involves the named insured's products), but also loss of use of impaired property, i.e., tangible property not physically injured. The insurer cannot have it both ways. A given situation either involves physical injury to tangible property or loss of use of tangible property not physically injured.
Fortunately, some courts take the time to figure this application properly. One such case is Standard Fire Ins. Co. v. Chester-O'Donley & Associates, Inc., 972 S.W.2d 1 (1998). This case arose after a new music building, which was substantially completed, began to reveal some serious problems with the HVAC system that could not be remedied by fine-tuning it. It was determined that the problems were caused by defects in the system's ductwork. In light of this situation, the general contractor terminated its contract with the subcontractor and performed the mechanical portions of the work. The general contractor then submitted a claim to its insurer which paid for removing and replacing the entire duct system.
When the subcontractor submitted its claim with its insurer, it was denied. Turning to the impaired property exclusion, the court stated that the exclusion's effect was to bar coverage for loss of use claims (1) when the loss was caused solely by the insured's failure to provide work of the quality or performance capabilities called for by the contract and (2) when there has been no physical injury to property other than the insured's work itself. The court went on to say that the exclusion did not apply, if there was damage to property other than the insured's work.
The court also referred to two texts, which featured illustrations on the application of the impaired property exclusion involving heating and ventilation systems. One of these was the Commercial General Liability Coverage Guide, written by Donald S. Malecki and Arthur L. Flitner, published by the National Underwriter Company. The example given by the court from this book stated: “[S]ay that the insured installs a heating and ventilation system in a new building. If the system later proves to be defective, resulting in the loss of use of the building while the system is being repaired or replaced, the insurer can cite the portion of the exclusion relating to impaired property in denying coverage for a resulting loss-of-use claim against its insured.”
Another case that demonstrates what the impaired property exclusion is intended to exclude is PCS Nitrogen Fertilizer, L.P. v. U.S. Filter/Arrowhead, Inc., 834 So. 2d 456 (2002). In this case, PCS had entered into a water services agreement, which required Arrowhead to design, install, and service a water purification system. PCS alleged that Arrowhead failed to provide a water supply system in conformity with the contract, thereby breaching the agreement and forcing PCS to shut down its operations.
PCS sued Arrowhead and its insurer, Commerce Insurance, alleging that as a result of the shutdown, PCS incurred maintenance and start-up costs, as well as the time and value of lost production. Commerce denied coverage to its named insured, Arrowhead, on the basis that the pleadings, depositions and other discovery responses submitted by PCS made it clear that there had been no physical injury to tangible property and that the only damages claimed were for breach of contract and loss of use of the water that was supposed to have been generated by the water purification system. In other words, the exclusion applied to pure economic loss based on breach of contract and nothing more.
Commerce Insurance pointed to these facts in arguing it has a right to rely on the impaired property exclusion in denying coverage to Arrowhead. PCS argued that the impaired property exclusion was ambiguous, because it did not define the term “physical injury” as used in the exception to this exclusion, that is, “the loss of use of other property arising out of sudden and accidental physical injury to the insured's product or work after it has been put to its intended use”. The court summarily dismissed this argument noting that PCS's claim was not for damages due to physical injury to its plant, equipment and other property. Further, the court noted that the term “physical injury” would be given its plain meaning, if that had been necessary. The court went on to hold that the impaired property exclusion unambiguously excluded coverage for the loss of use associated with a breach of the water services agreement.
While it may be clear, based on these and similar cases, what is not meant to be covered, certain coverage does apply, in light of what the last paragraph of the impaired property exclusion states is not excluded. To repeat, this exclusion does not apply to the loss of use of other property arising out of the sudden and accidental physical injury to the named insured's product or work, after either has been put to its intended use.
Can the Property Be Restored to Use?
What sometimes is overlooked in the haste of an insurer's denying a claim, or by an insured failing to consider all provisions having to do with the impaired property exclusion is the exception within the definition of impaired property. This states that for property to fall within the definition of impaired property, it has to be property that can be restored to use by (1) the repair, replacement, adjustment or removal of the named insured's product or work, or (2) the named insured's fulfilling the terms of the contract or agreement. Conversely, if the property in question cannot be restored to use through repair, replacement, etc. or through fulfilling the contract or agreement, the exclusion (m) does not apply. For example, in Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc., 78 Cal. App. 4th 847 (2000), the impaired property exclusion was held to be inapplicable where cereal nut clusters, found to contain wood splinters, could not be restored to use.
A more potentially troublesome scenario is whether the required replacement or restoration, which can be done, is still possible in light of its cost; in other words, whether the restoration can be done reasonably and economically. An example is where lumber used to build tract houses is discovered to be defective and presents the high probability that the houses may become unsafe over time. The owners not only sustain loss of use of their houses, because of the potentially unsafe conditions, but also diminution in the value of the property. Whether the impaired property exclusion applies here is a question that cannot be definitively answered because the ultimate question is whether the houses can be restored to use with the repair or replacement of the lumber. In theory, the answer is yes. But for all practical purposes, the answer is likely to be no, because it may require the dismantling or destruction of the houses in order to restore them to use. In other words, the question is whether the required restoration can be done reasonably and economically.
The Temporal Impact of “Sudden”
What may beg a question here is what is meant by the word “sudden”, used in conjunction with the word “accidental” with reference to situations where coverage may apply as an exception to the impaired property exclusion? Since the word “sudden” is not a defined term, and it creates a temporal effect, what the courts decide sometimes is interesting. One such case is Indiana Lumbermens Ins. Co. v. PrimeWood, Inc., 1999 WL 33283343. PrimeWood, Inc. manufactured cabinet doors. From 1989 through 1994, it used in its manufacturing process a white plastic foil supplied by GmbHJ & Co. Veredelungen (Roxan), a German company. From 1989 through 1991, the cabinet doors, incorporating the white plastic foil, were apparently of satisfactory quality.
In 1992, PrimeWood was said to have begun receiving complaints from its customers, cabinet manufacturers, about premature yellowing of the cabinet doors. PrimeWood, in turn, complained to the foil supplier, Roxan, which initially insisted the yellowing problem was due to PrimeWood's manufacturing process. Subsequently, independent testing revealed that the Roxan product was chemically unstable. After discontinuing use of this foil product, the yellowing problem disappeared as to new production. At this point, PrimeWood decided to bring a civil action to recover damages from Roxan. Although PrimeWood had CGL and umbrella liability policies from three different insurers for the time periods involved covering the damages incurred from customer complaints, this case dealt solely with the coverages provided by the St. Paul.
After the court took into consideration (but did not resolve) whether there was property damage, and decided that no coverage applied for damage to any of the named insured's products (that which it made or were made on its behalf), the court turned to the impaired property exclusion. The court repeated how this insurer's exclusion read. The insurer was not obligated to cover “property damage to impaired property, or property that has not been physically damaged, that is caused by [the insured's] faulty or dangerous products or completed work, or a delay or failure in fulfilling the terms of a contract or agreement”. The court then turned to this exclusion's exception which provides that the exclusion did not apply “to damages that result from the loss of use of other property not physically damaged that is caused by sudden and accidental physical damage to [the insured's] products . . . after they have been put to their intended use.”
On this issue, the insurer argued that the cabinets incorporating the doors constituted impaired property, as defined in the policy, thereby precluding coverage because of the impaired property exclusion. PrimeWood, which was said by the court to have apparently conceded that the cabinets were impaired property or property that was not physically damaged, argued that the exception to the exclusion (in question) applied because the yellowing of the cabinet doors occurred in a sudden and accidental manner. The parties, however, contested whether the premature yellowing could be fairly characterized as sudden and accidental.
In considering the phrase “sudden and accidental”, the court, after reviewing cases in other jurisdictions, found its meaning in PrimeWood's favor. These cases were Just v. Land Reclamation, Ltd., 456 N.W.2d 570 (1990), which concluded the phrase “sudden and accidental” to be susceptible to more than one reasonable meaning, including “abrupt and immediate,” as well as “unexpected and unintended”, thus ambiguous, and consequently construed in favor of the insured; Patz v. St. Paul Fire & Marine Ins. Co., 15 F.3d 699 (1994), which acknowledged the Wisconsin Supreme Court's interpretation of “sudden and accidental” as “unintended and unexpected,” as set out in the preceding Just case; and Liberty Mut. Ins. Co. v. FAG Bearings Corp., 153 F.3d 919 (1998), which interpreted Missouri law and concluding that the phrase “sudden and accidental” included a “temporal element such that it is abrupt, immediate and unexpected.” (Although not considered in this case, and with no intention to confuse the temporal issue, it has been mentioned that the word “sudden” could also mean an event that is slower than instantaneous but faster than gradual.)
From the court's perspective of this issue, the premature yellowing of the doors was said to be unexpected and unintended on the part of PrimeWood. Even if a temporal element was presumed, the court said, the relative rate of the yellowing of the doors was sudden in comparison to the normal rate of yellowing to be expected. The court therefore concluded that the exception to the impaired property exclusion was applicable and consequently, the insurer was precluded from denying coverage under this exclusion. Because this court did not find PrimeWood's claims conclusively foreclosed by the arguments raised by its insurer, St. Paul, the latter's motion for summary judgment was denied.
The Process of Determining Applicability
A number of different approaches can be used to determine the applicability of the impaired property exclusion. Probably the most common scenario for using a checklist is not in determining whether coverage applies, but, instead, in coming to the conclusion that the impaired property exclusion does or does not apply. The reason for this statement is that coverage will not be won simply by showing that this exclusion does not apply. As has become somewhat obvious over the years, the impaired property exclusion is but one of several such provisions that usually have to be considered in a given claim situation. The exercise of a checklist, therefore, helps to prove or disprove the application of this exclusion. In other words, even if this exclusion is found to be inapplicable, the insured still will have others to address in coming to the final conclusion of whether coverage applies.
Assume for purposes of illustration that a manufacturer's component part, when added to a machine of another manufacturer for purposes of sale to others, causes the machine to work improperly resulting in loss of use. It is determined that the machine can be restored to use with the removal and replacement of the defective component of the named insured. The manufacturer who purchases these components brings a legal action against the component supplier for loss costs and expenses. The component supplier maintains a standard CGL policy that includes products and completed operations coverage.
Is there property damage as defined? If the answer were to be no, that would be the end of the matter for purposes of this exclusion. The answer in this case, however, should be yes in light of the second definition of property damage. If the insurer were to also maintain that the first definition of property damage also applied, it would have to be dealt with separately after the application of this query.
Is there property damage to other tangible property that cannot be used or is less useful? If the answer is no, that is the end of the matter. The answer here is yes, because the component has made the manufacturer's machine work improperly. In light of this answer, one needs to proceed to the next question.
Is the loss of use or impairment of the manufacturer's machine due to the incorporation of the named insured's component (that is, “your product”)? If the answer is no, that is the end of matter in considering this exclusion. The answer here, however, is yes, because there was loss of use of the manufacturer's machine. This requires proceeding to the next question.
Can the other property, i.e., the manufacturer's machine be restored to use by the repair or replacement of the named insured's component product? If the answer is no, this exclusion would not apply. In this case, however, the manufacturer's machine could be restored to use by the removal and replacement of the named insured's component part. Therefore, one needs to proceed to the next question.
Has the definition of impaired property under the component supplier's CGL policy been met? If the answer is no, that is end of the matter. The answer here, however, should be yes. Tangible property (the machine) cannot be used or is less useful because it incorporated the component supplier's product that is known or thought to be defective, deficient, or inadequate, and can be restored to use only by its removal and replacement.
Did the loss of use of the manufacturer's machine arise out of sudden and accidental physical injury to the named insured's component product after it was incorporated into the manufacturer's machine and put to its intended use? If the answer is yes, this exclusion does not apply. If, however, the answer is no, this exclusion would apply, which is the case here, because there was no sudden and accidental physical injury to the component supplier's product.
Because the definition of impaired property also deals with breach of contract, the checklist would have to be amended by substituting the fourth question with the question asking: can the other property be restored to use by full performance of the contract or agreement? If the answer is in the affirmative, one must continue to go to next question.
Reading between the lines of this discussion, the conclusion is that what the impaired property exclusion is designed to preclude is, namely, pure economic loss arising out of a breach of contract. Kept in perspective, this exclusion therefore serves a purpose in addressing the type of business risk evidenced in the cases discussed, particularly the PCS Nitrogen Fertilizer L.P. case. However, when this exclusion is used by insurers to deny coverage in situations involving physical injury to tangible property, such as in the Crown Packaging International case, where the court agreed with the insurer, the convoluted wording and drafting history make a determination as to its application extremely difficult, if not impossible, to reconcile.
If the intent, in fact, is to apply this exclusion across the board to all forms of property damage, insurers would be well-advised to revise the wording to clearly say so and correct previous pronouncements to the contrary. In simple terms, when there is a restriction to succeeding policy language, an insurer has an obligation to call the restriction to the attention of its policyholders and also to explain the restriction's impact on coverage. To say that the application of the current impaired property exclusion “results in essentially the same coverage as provided in the 1973 basic contract . . . and that the new exclusion (m), with a new definition of impaired property incorporated therein, is the equivalent of the 1973 exclusion (m)”, does not appear to signal to policyholders the type of red flag warning they are owed, if, in fact, the impaired property exclusion is to be applied broadly.
In the final analysis, knowing how the impaired property exclusion applies is not likely to be the decisive point in winning or losing any case. Its mechanics, in other words, may help in showing that an exception applies so as to make the exclusion inapplicable, but there are likely to be other exclusions for the insured to contend with, such as damage to the named insured's products or work and the recall exclusion.