In this UK case, previously discussed HERE, the reinsurances provided cover “in respect of Property Damage only as a result of Direct Physical loss of or damage to the interest insured”.

The insuring clause indemnified the reinsured against “physical loss or physical damage to buildings and contents” and the Occurrence definition referred to the insured sustaining “direct physical damage”.

The court observed that when an insured property suffered damage as a result of the insured peril it may be rendered a partial loss by suffering damage to a certain extent or rendered a total loss, by being destroyed. What is covered is only property damage by reason of direct physical loss (total loss) or damage to (partial loss). In this case the question was whether the insured’s warehouse or its contents and not merely the loss of use or deprivation of the property.

The court referred to previous authority which in English law “damage” usually refers to a changed physical state or “requires some altered state”. The court said that is the ordinary and natural meaning of the word used. There is no change to the physical state of property when deprivation of use occurred and no changed physical state.

On the facts of the claimed loss of the insured’s warehouse, by reason of seizure by the Taliban and loss of possession and control, was not indemnifiable.

The court acknowledged that a person could lose property as a result either of the physical loss of the property or being irretrievably deprived of it but the reinsurance cover in the case was, on its clear wording, only the former. That is the total physical loss of the property.

Insurers and reinsurers should review any damage wordings, including exclusions, in policies and, if the intention is not to indemnify for deprivation of the property absent actual physical loss, to make that clear.