The following issue has come up in our office. Company A sells seasonings to Company B to be used in Company B's food product. It is determined that the seasonings are defective, making the finished product of Company B unusable. In addition to a claim for the damage to the finished product, Company B is submitting a claim for loss of sales and profits. The insuring agreement on the CGL form states that the insurer will pay for those sums that the insured becomes legally obligated to pay as damages because of BI or PD. Would the lost profit and loss of sales be considered property damage and thus covered by the CGL form?

Illinois Subscriber

There may be a tendency to deny coverage for lost profits and loss of sales since the CGL insuring agreement applies to property damage, and property damage is defined a physical injury to or loss of use of tangible property. Profits and sales are not really tangible property. However, the insuring agreement has to be looked at in its entirety.

The insurer agrees to pay those sums that the insured becomes legally obligated to pay as damages because of BI or PD to which the insurance applies. In this case, the insured's product damaged another's property and there is no applicable exclusion to prevent coverage; so, the insurance applies. (The impaired property exclusion does not apply since company B's property cannot be restored to use; the finished product has to be thrown out.) There has definitely been property damage since company B's product has been physically damaged and rendered useless. So, the question is: what are the damages the insured is obligated to pay?

Damages are not defined on the CGL form. The dictionary defines damages as compensation in money imposed by law for loss or injury; this basically means damages are what the court finds they are. Therefore, if a court finds that loss of profits and loss of sales are damages that flow from the property damage, damages that are a consequence of the property damage that the insurance policy covers, then, these nontangible damages would be paid under the terms of the CGL form. Loss of profits and loss of sales would not in and of themselves be covered since they are not tangible property, but since they are natural consequences of a covered property damage loss, the CGL form would pay such damages.

 

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