Massachusetts federal district court holds that physical damage is required for coverage for "direct physical loss"

In Tocci Bldg. Corp. v. Zurch Am. Ins. Co., 2009 WL 3182858 (D. Mass.), Tocci was the general contractor on a hotel construction job that included a large retaining wall. A small part of the retaining wall was damaged during a heavy rainstorm.

On June 9, 2000 the town in which the project was located issued a stop work order and declared the wall unsafe as a result of the damage from the storm. In early August the town gave Tocci permission to repair the damaged section of the wall. The repairs took less than a week.

In the meantime the town concluded that the wall had not been built in accordance with the approved plans and notified Tocci that the wall need to be demolished and reconstructed. Tocci disagreed. In November, 2000, the town agreed to permit the hotel to open if Tocci would grout the entire wall. Tocci agreed only in order to prevent further delays. Tocci then sought coverage from a builders risk policy for the cost of grouting.

The policy provided coverage for "RISKS OF DIRECT PHYSICAL 'LOSS'". "Loss" was defined as "accidental loss or damage."

The United States District Court for the District of Massachusetts held that the grouting was not a covered loss because the need for it did not stem from "direct physical loss or damage" to the wall.

The insureds argued that the storm was "covered cause of loss" because it created a "risk of direct physical loss," and that physical damage was not otherwise required by the policy. The court disagreed:

It is true that the only express reference to "physical" damage is found in the definition of "Covered Causes of Loss" which, as quoted above, "means RISK OF DIRECT PHYSICAL 'LOSS'. . ." However, it would make no sense to cover an event which creates a risk of physical damage if physical damage was not a triggering event for coverage. Moreover, "loss" is expressly defined as "accidental loss or damage." It is impossible to read the insurance policy as providing coverage for "risk" in the absence of a "damage." Since it is undisputed that the grouting was not required due to damage to the retaining wall, there was no loss and hence no coverage.