David Delmar | The Policyholder Report | July 28, 2016
In a recent case, Oregon Shakespeare Festival Ass’n v. Great American Ins. Co., the 
federal District Court for the District of Oregon adopted a liberal interpretation of “property damage.” The Oregon Shakespeare Festival Association (OSF) suffered a loss during its season: nearby wildfires caused smoke to infiltrate a partially outdoor theater where performances were being held, necessitating cancellations.
OSF’s insurance policy covered “direct physical loss or damage” to its property and the “actual loss of Business Income” caused by such loss or damage. To get coverage for the business losses it sustained by cancelling performances, OSF had to show that the smoke infiltration, the undisputed reason for the cancellations, was “direct physical loss or damage” to property.
OSF argued that “physical loss or damage” means “any injury or harm to a natural or material thing.” Great American, OSF’s insurer, argued that air is not “property” and that covered damage must be “physical”— not just smoky air. The court agreed with OSF, finding that Great American’s definition was too restrictive. There was nothing in the policy, the court said, to suggest that contaminated indoor air is not covered, nor could Great American explain why air is not “physical”:
[W]ildfire smoke infiltrated the interior of the theater, making it uninhabitable and unusable for holding performances … Even though the loss or damage was not structural or permanent, the property experienced a loss of “essential functionality” … Based on the case law, as discussed above, the Elizabethan Theatre sustained “physical loss or damage to property” when the wildfire smoke infiltrated the theater and rendered it unusable for its intended purpose.
The court’s analysis suggests that a condition indirectly affecting property — that is, a condition preventing the intended use of property even if it does not necessarily damage the property itself — is “physical loss or damage.”
This broad interpretation has implications for both first-party and liability insurance claims, and could trigger coverage in a wider array of contexts. For example, under this interpretation wetting of gypsum board sufficient to affect its supportive function would be covered property damage. Even active leaks could qualify as property damage, since water intrusion in wall assemblies or interior living spaces is analogous to wildfire smoke in a partially enclosed outdoor theater.
Ball Janik will continue to track the development of the state of the law on this issue. We suggest that those who may have suffered losses along these lines consult with counsel to explore available insurance coverage options.