Appeals Court Confirms “Physical Loss” Must Be Tangible in Win for Insurer

The Sixth Circuit’s stance on the hotly debated meaning of “physical loss” could set precedent in insurers’ favor. Phelps’ appellate team upheld an insurer’s dismissal on summary judgment, arguing an insured’s economic losses did not fall under its “physical loss” coverage.

Courts have been split on the limits of “physical loss” coverage in recent years. This case hinged on several key arguments related to the interpretation of a marine cargo insurance policy under Kentucky law.

Phelps’ insurance team defended Lloyd's of London Underwriters against claims for unanticipated shipping expenses for raw alumina due to river lock closures. While Lloyd's paid $1 million under the policy’s Extra Expense Clause, it denied further coverage, asserting that the policy did not cover losses due to delay. The insured claimed the delays created a risk of physical loss to the alumina that tangibly deprived it of the ability to use its insured property in its ordinary manner.

The court found that the alumina did not suffer any physical loss or damage as required by the policy. The temporary delay did not tangibly deprive the insured of its property or lead to physical damage. The court also drew a line between the risks of failed delivery and untimely delivery, noting that the policy at issue covered the former and this case involved the latter.

Phelps’ defense underscores the distinctions between “physical loss or damage” and purely economic losses. Kentucky law does not recognize a “physical” loss when only economic impact is suffered without tangible destruction or deprivation of property. This ruling reinforces the principle that insurance contracts are to be enforced as written and affirms the boundaries of coverage for “physical loss or damage.” The Phelps appellate team was led by Partner Jeremy Grabill.