Almost every business property policy requires a “direct physical loss” to the insured property as a precondition for coverage. In some instances, “direct physical loss” is not defined in the policy and a dispute as to coverage arises. If so, the insured has the burden of proof to show that the claimed loss falls within the coverage provided by the policy’s insuring clause.1

That is simple enough to do if a peril such as fire causes obvious and discernable damage, but questions crop up “when the structure of the property itself is unchanged to the naked eye and the insured claims its usefulness for its normal purposes has been destroyed or reduced.”2 What must be shown if the damage is not readily apparent?

One court has held that a direct physical loss “contemplates an actual change in insured property then in a satisfactory state, occasioned by accident or other fortuitous event directly upon the property causing it to become unsatisfactory for future use or requiring that repairs be made to make it so.”3

Another court held for a loss to be covered, there must be a “distinct, demonstrable, physical alteration” of the property.4 Moreover, “some external force must have acted upon the insured property to cause a physical change in the condition of the property, i.e., it must have been ‘damaged’ within the common understanding of that term.”5

In sum, to the extent that “direct physical loss” is not defined in the policy, usually an insured must nonetheless demonstrate that the property in question suffered a physical change or alteration to satisfy the threshold requirement for coverage.

1 Aydin Corp. v. First State Ins. Co. (1998) 18 Cal.4th 1183.
2 10A Couch on Insurance (3d ed. 2010) § 148:46.
3 AFLAC Inc. v. Chubb & Sons, Inc. (2003) 260 Ga.App. 306.
4 MRI Healthcare Center of Glendale v. State Farm General Ins. Co. (2010) 187 Cal. App. 4th 766.
5 Id.