Can You Hear Me Now? Coverage for “Loss of Use” Does Not Include Most Repair and Replacement Costs
The First Circuit has addressed the issue of what constitutes “loss of use” damages in the context of a coverage dispute arising from wireless network outages. Vicor Corp. v. Vigilant Insurance Co. (1st Cir. March 16, 2012). Basically, “loss of use” coverage does not generally extend to the cost of repair or cost of replacement. But the 1st Circuit has also made clear that there are some exceptions to this general rule. In particular, repair costs that help expedite a repair and therefore help mitigate “loss of use” damages may be covered.
The network outages in this case were traced to the failure of a component part manufactured and sold by Vicor to Ericsson Wireless Communications. These parts were incorporated into radio base stations sold by Ericcson to be used in cellular telephone towers and networks. As the result of outages, Ericcson suffered losses in the form of compensation paid to its customers for the outages and costs to repair the Vicor products.
Ericsson’s suit against Vicor resulted in a $50 million settlement. Two of Vicor’s insurers contributed $13 million to the settlement leaving a $37 million gap that Vicor sought to have filled by its primary and umbrella general liability insurers.
The coverage dispute focused on the policies’ definition of covered “property damage” which included “loss of use of tangible property that is not physically injured.” The insurers argued that “loss of use” damages are limited to “a recognized measure of loss of use, such as the rental value of substitute property, lost profits, lost sales, or a comparable, quantifiable measure representing extra costs incurred or the value of losing the benefit of using that property” but only for the time reasonably necessary to repair or replace the property. The insurers also argued that loss of use damages did not include repair costs.
Vicor, not surprisingly, argued against imposition of a temporal limitation and contended that it was entitled to coverage of all sums paid to Ericsson due to the loss of use of the networks. After a jury awarded Vicor some, but not all, of its losses, the insurers appealed focusing on a jury instruction that permitted the jury to award damages for emergency repairs to the radio base stations that incorporated the insured’s defective product .
The First Circuit, noting the absence of definitive Massachusetts case law, relied upon a series of cases decided under California law and concluded that loss of use damages generally do not include repair costs because the economic loss sustained by an insured due to repairing or replacing its defective work or products is not an insured risk. Instead, loss of use damages “must be tied to the actual period during which the use of the non-physically injured property was lost and to the loss of use itself.” (Citations omitted.) Such classic loss of use damages include lost profits or the rental value of substitute property.
Nonetheless, an insured might be permitted to recover extra expenses incurred for emergency repairs above the ordinary repair costs if those extra expenses mitigate the loss of use damages and are distinguishable from ordinary repairs. An example is overtime work that hastens the pace of repairs or installation of a temporary fix that preserves some functionality until repairs can be completed. To take advantage of that mitigation exception to the general rule that repair costs are not covered damages for “loss of use,” however, the insured most show to “a reasonable degree of certainty,” the amount the loss of use damages would have been had the mitigation measures not been taken. Because the jury instructions did not capture these distinctions, the case was remanded for a new trial.
Tamara S. Wolfson
Posted In: Loss of Use