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Schaefer/Karpf Productions v. CNA Insurance Companies6/18/1998
rt of the cost of restoring the houses as were the wages of the carpenters. Neither the salaries of the workmen nor the expenses of overhead are themselves physical property; they are recoverable because they provide a measure of the dollar amount of the injury to the houses. Overhead is distinguished from lost profits and goodwill in that it represents not a potential asset of the business but an essential expense incurred in the performance of the work." (Ibid.)
Thus, in Geddes II, our Supreme Court made clear it was not following Hauenstein to the extent that case held reduced value itself constitutes property damage. Rather, it is the incorporation of a harmful or defective product into another product which produces the physical injury necessary for coverage under a CGL policy. Diminution in market value is a measure of property damage, not the damage itself.
The distinction drawn in Geddes II between the nature of the injury and the measure of damages resulting from the injury became more significant when the definition of "property damage" in the standard CGL policy was amended in 1973.
At the time Hauenstein and Geddes I and II were decided, the standard CGL policy contained no definition of property damage. In 1966, the policy was revised to define property damage as "injury to or destruction of tangible property." In 1973, this definition was revised to provide coverage for "physical injury to tangible property." (We will refer to this revision as "the 1973 definition.") Alternatively, coverage was provided for "loss of use of tangible property which has not been physically injured." (See Discussion in Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co. (1996) 45 Cal.App.4th 1, 88 (Armstrong).) As a result of the 1973 definition, some courts which had recognized incorporation-related injuries as property damage under Hauenstein's diminution-in-value theory held incorporation-related injuries were no longer covered unless the defective product caused loss of use of the recipient product. (E.g., Federated Mut. Ins. Co. v. Concrete Units, supra, 363 N.W.2d at pp. 756-757; and see cases cited in Incorporation and Liability Insurance, supra, at pp. 120-122.)
California courts, however, have held coverage exists under the 1973 definition of property damage when a harmful or defective product is incorporated or linked to another product because this incorporation or linkage results in physical injury ; diminution in the value of the recipient product is not the injury but one way to measure damages from the injury.
In Armstrong, supra, the court addressed the question whether the installation of asbestos-containing building material (ACBM) constituted "physical injury " to the building under the 1973 CGL policy even if no asbestos fibers had actually been released into the building. (45 Cal.App.4th at p. 88.) In holding there was physical injury, the court explained:
"Once installed, the ACBM . . . is physically linked with or physically incorporated into the building and therefore physically affects tangible property. We agree with the formulation put forth by the Seventh Circuit Court of Appeals that the term `physical injury ' covers `a loss that results from physical contact, physical linkage, as when a potentially dangerous product is incorporated into another and, because it is incorporated and not merely contained (as a piece of furniture is contained in a house but can be removed without damage to the house), must be removed, at some cost, in order to prevent the danger from materializing.' (Eljer Mfg. Inc. v. Liberty Mut. Ins. Co. (7th Cir. 1992) 972 F.2d 805, 810 . . .) . . .." (Id. at p. 92.)
Respo
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